2.2 The Compliance Processes

1.4 Moral Leadership and Profi t

We lose ourselves when we compromise the very ideals we are fi ghting for.

And we honor these ideals by supporting them not when it’s easy, but when it’s hard. — Barack Obama, President of the United States of America, in his Nobel Prize acceptance speech, December 10, 2009

One of the major diffi culties globalization brought with it was this very relativization of ethics in companies and in the economic sector. From this perspective, it was considered and still is the case that values and principles, internal rules, and good practices from the country any multinational may originate in cannot be applied a priori in the countries where the majority of the manufacturing has been moved to or in the areas where such a country obtains its raw materials. Moreover, some representatives of the business environment went as far as to the point where they justifi ed this way of making business by saying the Western values are applicable in the West only, whereas other countries must take their local values into consideration. Such a cynical mentality has no place in an organization with a solid ethics culture or within one that took on the mission of promoting integrity in business. Moral leadership is a method of reducing this cynical mentality to the level of just an industry or a region. It promotes the very own upright attitude regardless of the legislative situation from a certain country, regardless of the constraints which may or may not exist there, regardless of how the business environment behaves in general. Moral leadership looks for alternative routes, which are ethical and legal at the same time, alternatives with the help of which the company and its stakeholders’ benefi t increases at the same time. For instance, moral leadership transforms thinking such as how do I hide cashing through accounting schemes? The alternative to that is thinking who should I form a partnership with in order to have advocacy work so that authorities develop a new friendlier fi scal policy to satisfy the government’s need of bringing more resources for the state budget at the same time . Both measures require effort and resources, but the second one has the advantage of being a legitimate method of doing business, which attracts trust with it.

1.4.1 Low Transactional Costs

The greatest benefi t that moral leadership covers is reducing transactional costs. In other terms, a company known as a moral leader is one that does not have tense relationships with its stakeholders, no matter who they are. This drop in transactional costs, both inside and outside the organization, happens mainly thanks to the trust gained as a follow-up of consistently adopting an upright behavior in business.

1.4.2 Lower Promoting Costs

The infl uence a good reputation has on promoting budget is not at all to be neglected. When the large public acknowledges a company as being a moral leader, it tends to prefer the products and services of the said company over those of its competitors.

1.4.3 Long-Term Profi t

In some cases, moral leadership leads to strong customer fi delity, and this obviously involves a constant cash fl ow. In other words, moral leadership, and trust at its base, leads to making a difference when a client decides they prefer the products or services of a company with this reputation, even under crisis, when economic behavior changes signifi cantly. However, there are also situations when moral leadership in fact boosts the consumption of goods and services from such a company. In fact, this last variant is the most interesting for the business environment, because it leads to increasing market volume. A solution of this kind can be applied through fi nancial education initiatives supported by banks, associations of banks, and commerce chambers or investments in technological development labs, non-curricular programs, and competitions for students, by companies which develop and sell technology (from those producing cell phones to those producing computers and peripherals). Local entrepreneurial models can be used as an alternative for outsourcing in textile and accessory manufacturing, and even car building – this last way of benefi ting from moral leadership is based on the horizontal increase of profi t, by increasing product and services demand, not vertically, by piling up services and products on the same clients. It is one thing to have many clients choosing your products and services because they know you as a moral leader in the business environment and a different one trying to determine the decision of market clients.

1.5 The Principles of Moral Leadership

Ethical companies tend to realize that doing the right thing is actually good for the business also—and (they) drive and encourage a culture that emphasized this.— Alex Brigham, CEO of Ethisphere Institute

There isn’t a recipe that a company should follow in order to become a moral leader, as well as there isn’t a recipe that turns a person into a leader. At the same time, being acknowledged as a moral leader takes time. Organizational behaviors and consistent integrity-promoting initiatives are those that make a difference at market and large public level, and these do not happen instantly. If we observe moral leaders in different industries, we can still obtain a set of principles they act upon and follow. The list can vary, but in essence it can be summarized to the following elements that function integratedly, meaning a company must meet them all.

1.5.1 Ensure Functional Compliance Settings and Make the Step from Conformism to a Culture of Integrity

To be able to aspire having moral leadership acknowledged, the fi rst essential requirement is the company’s voluntary compliance with the regulation setting—in terms of both legislation and standardization or habitual for the industry where the company develops its activities. This will not be enough, though. Most companies comply with the law only because they fear sanctions—this behavior is called conformism: I comply with a regulation as long as a sanction and someone to apply it exist. Very few companies invest time in changing conformism with a culture of integrity, where employees and managers as well think about complying with a rule because they understand what they are asked and the impact that not complying with it can have.

Conformism is dangerous because it does not imply initiative . Such an example is that of a company that doesn’t withdraw a dairy product, let’s say yogurt or milk—even though it recorded high levels of a substance accepted within minimal limits—before being informed a public authority is about to make an announcement regarding that product or when they are explicitly asked to withdraw the product. Integrity, on the contrary, determines the organization, with the risk of losing a sum of money, to withdraw the product form the market as soon as the fi rst evaluation of the substance level took place.

1.5.2 The Commitment to Transparency Is a Reputation Growth Instrument, Not Just a Cost

One of the issues was signaled when Transparency International Romania released the study Integrity in the Business Environment in Romania—Research on the Mechanism of Ethics Institutionalization in Companies in December 19, 2011. The study identifi ed, in the case of many brands, the real name of the companies owning those brands. It was hard to fi nd out elementary information, such as registration number in the Commerce Registry or company’s address, although the information is mandatory, according to the law of trading companies. This is proof of lack of transparency. It turned into an integrity risk when some companies refused to say how many employees they had, even though they were only required to check some intervals, not give the exact number, which varies across a fi scal year. This lack of transparency is seen daily in the business environment. Many companies prefer not communicating at all with their stakeholders, even through annual reports, considering that any kind of information can jeopardize their position on the market. But this is false and denotes managerial immaturity. Transparency does not mean publishing the patent company invested €30,000 in or even €30M. However, it is a proof of transparency when you are not hiding the content of a product through ambiguous or general expressions. ( This product contains pork and beef meat in a mix ,

where in fact mix hides meat and scraps—tendons, grease, and other things which cannot be commercialized—in unknown, mechanically processed quantities.) Another proof of lack of transparency is when you state that the social responsibility budget was of €5M without offering information on how much of the budget was spent, for instance, on aggressive communication campaigns. However, transparency is useless as long as it is not engaged and as long as stakeholders’ interests are not taken into consideration and are not involved on the topics communicated. Another proof of transparency companies must show is the one concerning public decisions infl uencing the activities of company representatives or third parties. Being transparent in this regard means showing your interests concerning a public policy or decision are legitimate, meaning they do not contravene public interest. Engaged transparency, the one that has company representative and its stakeholders discussing, has the essential role of raising trust in the company. The higher the trust in the company, the better the reputation, and the better the reputation, the higher the client loyalty and the more reduced the marketing costs.

1.5.3 Involve Your Stakeholders!

An old Indian proverb says that, when a yogi concentrates exclusively on his breathing, he will not start to breathe better or breathe fresh air. Profi t is as essential for every company as breathing air is for an individual. The more you focus on it, the more you lose sight of the truly important things. The fall of big corporations during the economic crises of the last two decades happened due to this fi xation on profi t, which lead to a total lack of consideration toward its stakeholders. Michael Sandel, one of the most renowned experts from Harvard Business School, blames in his last book What Money Can’t Buy this exact vision, which led to modifying human beings and many other things. The fi rst of the two most illustrative examples Sandel offers is the one of the price paid by some pharmaceutical companies to the ones who willingly accept being guinea pigs for drug testing— $7500. 2 The other example refers to the price of the system, where you can buy an old or ill person’s insurance policy, pay the annual insurance premiums while the person is alive, and collect the benefi ts when the person is deceased. 3 These two examples highlight the fact that the person, the individual, no longer matters as long as profi t is at stake. A moral leader is the one who begins concentrating on how he can generate value for himself and his stakeholders. However, in order to know what kind of value your stakeholders are after, you must identify and listen to them.

Lead by listening—in order to be a good leader, you must be a good listener.— Sir Richard Branson

2 Michael Sandel, “What Money Cannot Buy.” In The Moral Limits of Markets , Allen Lane, London, 2012, p. 4. 3 Ibid, p. 5.

1.5.4 Reduce the Risks of Lack of Integrity in Creative and Ethical Ways!

In the context where the corruption phenomenon seems to be the major cause that affects and breaks the principle of free competition in trading transactions, discourages investments, and raises goods and services’ costs, it is extremely important for the private sector to develop mechanisms that reduce corruption and its impact at a global level. The impact of corruption on business at a global level is dramatic, estimations showing corruption numbers equal to more than 5 % of the global GDP (approximately $3 trillion) and that the corruption phenomenon raises global business costs with up to 10 % on average. An organization that is consistently mindful about its impact outside and inside notices the costs the lack of integrity brings and tries to diminish them. Reducing the risks associated with the lack of integrity does not happen just as reducing the paper fl ow between departments, but it requires a lot of creativity and ethics in order to imagine and fi nd possible negative situations and identify the most appropriate measures in order to work against them. What could you do in case you suspect that one of your competitors agrees with the authorities’ representative that, in exchange for hidden commissions, they provide information regarding offers from public auctions? Going to the authorities is not the best solution, because you don’t have proof and any accusation based on a guess is insuffi cient to have an impact not only on the person you suspect but on the entire competitor chain, so that the next time there won’t be another to work as the fi rst one. An alternative is determining an integrity pact within the industry, where you bring as many competitors as possible and make them aware that such a disloyal competition affects everybody at the same level. It takes more time, it involves effort, but the result is also on the long run.

1.5.5 Communicate Your Business Integrity Model Internally and Externally

Having internal mechanisms that prevent corruption and promote an ethical behavior within the organization is not enough, because one must also communicate this. Internal and external communication is the one reputation is built upon, meaning the external perception regarding how fair you are in business. If you do not communicate, people are not aware of your company’s integrity culture and this leads to it being perceived as a stranger and as untrustworthy. This is a natural reaction everyone has toward the ones they do not know. The experience of some companies which are on the 100 Most Ethical Companies at Global Level list made by Ethical Corporation proved that an active communication in terms of integrity in the business environment has a major contribution in helping customers become loyal and attracting new ones. The benefi ts of communicating con-

stantly with the stakeholders are countless, but what could be noticed consistently is the fact that leader companies in terms of integrity do not feel the economic crisis.

1.5.6 Develop an Initiative of Promoting Integrity in Your Industry and Determine Other Companies and NGOs to Join You in Promoting Integrity!

The fi rst principle talked about what one should do at an organizational level. This principle is the one that makes the difference between moral leader companies in their industry or regionally and the rest of the companies, which do various things in terms of integrity, but remain within their walls. This principle refers to developing an initiative designed to promote integrity on the market, so that the integrity model be multiplied in case of other companies. The example of the integrity pact signed between companies in the aeronautical area at a global level is worth mentioning. International Forum on Business Ethical Conduct for the Aerospace and Defense Industry (www.ifbec.info) is not just a group of companies and associations from the industry, or a set of moral principles applicable to this industry ( Global Principles of Business Ethics for the Aerospace and Defense Industry ). It is a mechanism whereby signing companies commit to respect the principles and when one of them does not follow, a sanction on behalf of the other organizations will be applied. Through this mechanism, companies admit the fact that disloyal competition and other unethical behaviors in the business environment not only affect companies behaving like this but the entire industry. Loss of trust is refl ected upon every organization, not only upon the one committing the fraud or upon the one who tried to buy infl uence from the authorities of a certain country. On the other hand, the mentioned integrity pact ensures a uniform application of the ethical principles not only regionally but also globally, within the industry. Therefore, the gift given by a company to a public offi cer in order to speed some papers up is no longer illegal and immoral in the USA or the EU but also in Nigeria, Romania, Afghanistan, or Brazil.

1.6 Moral Leaders’ Club

Leadership is action, not taking a stand. —Donald H. McGannon led Westinghouse Broadcasting Company

Moral leaders do not form overnight. They are built in time, through cooperation, dialogue, and initiative. The present volume traces the broad framework through which these moral leaders can develop. Companies are formed of people—managers and employees all called to work together in order to build a

culture of integrity and trust. Transparency International Romania took on the role of developing both the framework and the platform which reunites those companies interested in taking up on this approach of integrity and putting at their disposal the instruments and necessary technical assistance. The platform where these companies reunite is a form of clubbing , an informal and unpatrimonial associative form designed to strengthen the dialogue and collaboration of companies with integrity in promoting their own example in the business environment of Romania and beyond. It is a way through which organizations are encouraged to go from their own initiatives to the ones based on partnerships, from individual roads to shared projects.

Chapter 2 From Conformism to a Culture of Integrity

2.1 The Compliance Framework: Essential Requirement

Regulating activities and complying with regulations, practice and professional codes, as well as the acknowledged good practices have therefore become more and more important. These necessities appear the more pregnant in the context of an economic crisis generated specifi cally by not complying with regulations, good practices, ethical principles, and values, which ultimately led to corruption. One of the most important responsibilities of the management structure in any organization is creating an appropriate framework, an internal control system that ensures the organization’s compliance with the applicable regulation framework, and with the applicable codes of conduct, practice codes and professional codes, as well as with their own policies and procedures. This system must ensure the prevention, detection , and the correct management of the organization-specifi c compliance risks .

Compliance can be defi ned as the conformation/alignment of an organization with the previsions of the regulation framework applicable to its activity , norms , and own standards , as well as with the conduct and professional codes and standards set on the market or the related industry, making sure that this regulation framework is followed.

Noncompliance risk is represented by the risk that an organization may incur the sanctions mentioned in the regulation framework , signifi cant fi nancial losses , or reputation loss as a consequence of the company ’ s noncompliance with the rules of the regulation framework , with its own norms and standards , as well as with those regulations of conduct codes established by the markets or industry applicable to its activity.1

Compliance system is represented by the sum of processes , instruments , measures , and methods through which compliance is ensured. This is done by establish-

1 After the defi nition given by the National Bank of Romania’s Rule no. 18 of Sept. 17, 2009, published in the Offi cial Journal, part I, Sept. 23, 2009, on the framework for the administration of credit institutions’ activity, the internal process of assessing capital risk-fi tness, and the circumstances of outsourcing those institutions’ activity.

© The Author(s) 2016 S. Văduva et al., Moral Leadership in Business, SpringerBriefs in Business, DOI 10.1007/978-3-319-42881-9_2 13

ing a proper and transparent administrative framework vertically , from management to employees and vice versa , as well as horizontally ( between departments ), reporting lines , as well as allocating clear responsibilities and clear , precise , well-defi ned , transparent competences that are coherent and utilized , respectively applied. In addition, it is done by delegating and allocating responsibilities and proper workfl ows, possibly by organizing a function or a compliance department within the company or hiring a professional consultant.

2.2 The Compliance Processes

Management structures are the ones that have the fi nal responsibility of the company’s well-being and therefore of the company’s compliance process with the applicable regulation framework, conduct codes, and its own policies and procedures. In addition, each employee has the obligation of ensuring, within their daily activities, compliance with the legal requirements, and reaching the targets while complying with the law as well as the internal policies and procedures. Each employee has the obligation of providing management and the person in charge of the compliance position with all the information necessary for a successful implementation of the compliance system/framework. There is often the completely wrong understanding that the compliance responsibility belongs only to the compliance department/offi cer. Complying with the regulations applicable to the company’s activity is the responsibility of each of the employees. This is, in fact, what our professional activity stands for.

2.2.1 External Processes: The External Compliance Processes Are Those That Encompass the National and International Compliance Framework as well as the Best-Practices Standards Developed by Certain Industries or Professional Associations

The regulations are normative acts emitted by the national compliance authorities (the Government, Romanian Parliament, or other authorities with ruling power, such as the National Bank, the National Securities Commission, etc.) or international (the European Commission or The Council of Europe). The codes of conduct or the professional codes are those standards for good practices issued by certain sectors or professional associations. Even if they are not ratifi ed by law (there are cases where they are ratifi ed, and then they become mandatory regulations), not observing them can lead to consequences as serious as not complying with the laws. There are countries where the legislation and compliance framework are adopted as a principle, not on a level of regulation/detailed rule—like in our country (as opposed to, especially, Anglo-Saxon legislation, where practice is the source of

law). Therefore, the distinction between regulations and best-practices standards becomes practically insignifi cant, its negative effects being the same.

2.2.2 Internal Processes: The Internal Compliance Processes Are Those Which Encompass Internal Mechanisms Developed by the Company in Order to Ensure Application of External Standards in Agreement with the Particularities and Needs of the Company, Thus Bringing Added Value to the Legal Regulations in the Field and Ensuring the Company’s Increase in Compliance and Integrity

Policies, procedures, processes, and internal fl ows are those internal regulations regarding a company’s activity. In addition to the strategic and/or operational side, they take on and transpose in the activity of the company, the regulations, the conduct codes and professional codes, and best-practices standards. The regulations, conduct codes or the professional ones, the best-practices standards, and the organization’s mission/values are key components taken into consideration when that organization’s strategy (short, medium, and long term), business guidelines, and risk appetite are established. These together materialize in the organization’s policies (set of general principles), which afterwards become mandatory for the personnel. Failure to respect them leads to sanctions applicable to the personnel. Implementing external and internal compliance processes involves a continuous internal process that falls under the responsibility of the management structure, of the compliance function/department/services, and of the entire staff of a company.

2.3 Compliance Principles

• Compliance and Integrity in Business This principle involves a company aligning to the provisions of the compliance framework applicable to its activity, interiorizing and implementing them within the company, and complying with their own standards and norms, but it also involves creativity in developing complementary mechanisms, which will ensure the implementation of legal norms beyond the mere law. • Respect for the Clients This is a principle that places the client at the center of all activities of the company. The private sector must comply with the legislative framework and develop

internal mechanisms so that it adds value to its relationship with the clients and thus increases the company’s credibility. • Organization and Control: Adapted, Effi cient, and Effective (Corporate Governance, Internal Control System) Any company that wishes to observe compliance standards must develop a system of internal control, both horizontally and vertically, toward the management structures, through which it will ensure that the internal compliance procedures of the company are followed. Such control allows them to properly analyze the compliance framework and take action on the higher structural and strategic levels. • Transparency, Fairness, Reciprocity, Proactivity, Equality, and Fraud Prevention

Systems A company following compliance standards will develop, implement, and communicate its internal mechanisms for the prevention of the corruption phenomenon. Special importance is given to the dissemination of information regarding compliance at all organizational levels, among partners, shareholders, and clients. • Proper Risk Management It implies effectively identifying, monitoring, and controlling compliance risks throughout the entire fl ow of an activity, process, product, or service, from the fi rst operation to the last one. By analyzing compliance principles, we will see they overlap for the most part with the requirements that govern the idea of moral leadership. However, compliance alone isn’t enough. Building a culture of integrity is needed.

2.4 Legal Conformism

Businesses cannot prosper without proper and responsible corporate governance… companies that spend their resources fi nancing corrupt businesses will progressively lose their competitiveness. —United Nations Global Compact Offi ce, Business against Corruption

Conformism implies mechanical and uncritical acceptance; the legal submission of the private sector vis-à-vis the judicial norms without having an internalization and taking-on process of the content of those norms and without preparing particular instruments to serve its application in the organization. In the private sector, unethical practices have a great impact on the image and reputation of a company and, ultimately, on its profi t. In this context it seems insuffi cient for the business sector to accept automatic obedience for the legal norms, without fi nding complementary and effi cient mechanisms for its implementation and observance. Moreover, a company that aspires to be an integrity leader is a proactive company in implementing and developing complementary mechanisms that ensure respecting and applying legal norms. In addition, a company that does not prove to its stakeholders that it is a business partner preoccupied and involved in developing the mechanisms that ensure integrity in its actions and decisions will lose profi t, professional rela-

tionships, reputation, image, etc. Building a business environment of integrity, responsible and sustainable, that will regain the public’s trust by creating and maintaining an open, mutually profi table relationship not with its own shareholders but with the entire public assumes more than mere conformism.

Passing from legal conformism to a culture of integrity requires the companies to be preoccupied with fi ghting corruption, creating mechanisms for implementing the legislative framework, developing internal mechanisms and instruments to restrain employee behavior such that they may act with responsibility and integrity in their activities, and improving the company’s regulations in order to directly contribute to building a culture of integrity.

Integrity implies complying with the legal norms, their internalization, and their assumption on behalf of the company; it does imply compliance with internal norms, but at the same time, integrity implies creativity in developing complementary mechanisms beyond the law. A fi rst step in developing a business that promotes a culture of integrity is identifying the main integrity risks—it is important for the business sector to identify the main threats that bring vulnerability to respecting the integrity standards in any areas of the employees’ work activity, in order to develop effi cient mechanisms to prevent it. Developing mechanisms to support promoting a culture of integrity is the second important step—the business environment must promote among its employees the corporate values and principles that would govern their entire activity.

2.5 Moving from Conformism to a Culture of Integrity

Besides developing internal compliance instruments at company level, transitioning to a culture of integrity requires promoting “living the values” among employees, i.e., a strong alignment to the values and principles that defi ne the company. Through integrity in the private sector, we will understand the ensemble of the legal aspects at the core of all decisions, internal compliance instruments developed for their compliance and implementation, and the commitment and perspectives employees have on company’s values and principles.

Transposing the company ’ s values , principles , and beliefs into practice brings long-term performance, competitive advantages, and profi t for any organization. The values and principles of the company are the ones guiding the employee when making decisions. A strong organizational culture has a strong alignment to the values and principles of the organization, and building an organizational culture is based on the following: • The example and quality of leadership, a clear and unequivocal commitment of complying with the company’s values and principles • Permanent communication of the company’s values and principles among employees and stakeholders

• Continuous education and training of the employees in the spirit of the company’s values and principles • Appreciating the values and principles as real business partners which improve the company’s activity and long-term profi t It is proven that all organizations that promoted a culture of values, ethics, and professional conduct, based on compliance and social responsibility, have long- term sustainable profi t (a few examples: Disney, Starbucks, General Electric, Johnson & Johnson, Ford, etc.).

2.6 Ethics, Integrity, and the Fight Against Corruption

Unethical practices, or those that lack integrity, have a huge impact on the image and reputation of companies from the private sector, affecting their profi t too. Taking on the values and principles of the company will determine an ethical business sector within which there will be an interest for developing instruments to combat corruption. Therefore, an ethical business sector, with a strong organizational structure, will develop and promote internal corruption-combating instruments, which will prohibit 2 : • Offering, receiving, or accepting any kind of bribe or using any kind of means or channel to offer benefi ts to the clients, suppliers, or any public institution with the purpose of maximizing the company’s profi ts through illicit or unethical means. • For employees to facilitate or accept bribe or commissions on behalf of the clients, suppliers, or public institutions for their own benefi t or that of their family, friends, associates, or acquaintances. • Direct or indirect contributions of political parties, organizations, or people involved in politics, with the purpose of obtaining advantages in trading transactions. All donations must be done by complying with the principle of transparency. • Transforming/using charitable contributions and sponsorships as a cover-up for bribe. • Offering or accepting gifts or protocol expenses or having other expenses paid for them whenever such measures can affect the result of transactions and do not involve reasonable, good-faith expenses.

Corruption is one of the major causes affecting and breaking the principle of free competition in trading transactions: it discourages investments and raises the cost of goods and services. In this context, it is extremely important for the private sector to develop mechanisms that diminish corruption and its impact globally. According to the defi nition proposed by Transparency International, corruption represents the abuse of entrusted power , in either the public or private sector , with the purpose of

2 Transparency International, The Business Principles for Countering Bribery, 2009.

satisfying particular or group interests . Therefore, any act of an institution or authority that has as consequence any damage to the general interest with the purpose of promoting a personal interest/profi t can be classifi ed as corrupt. 3

Corruption can manifest in the private sector under different forms : (a) Receiving bribe is the deed of the public offi cer who, directly or indirectly, claims or receives money or other benefi ts that are not appropriate to them or accepts the promise of such benefi ts, or fails to refuse it, with the purpose of fulfi lling or not fulfi lling or delaying the application of an act regarding their own work duties or in view of doing a deed contrary to their duties. (b) Giving bribe represents promising, offering, or giving money or other benefi ts to a public offi cer by an entity in order to illegally satisfy an interest. Private companies most of the time offer bribes in order to 4 : • Buy contracts with the State. Bribery can infl uence the State’s decision of granting contracts to certain organizations. • Obtain benefi ts on behalf of the State. Bribery can infl uence allocating benefi ts on behalf of the State for certain organizations. • Obtain licenses. Bribery can be offered in order to infl uence granting licenses for enterprises to perform certain activities. • Accelerate being granted a certain permission on behalf of the State for the private sector. (c) Receiving unwarranted benefi ts is defi ned as the receiving, directly or indirectly, of money or other benefi ts by a public offi cer, after doing a deed their position allowed and to which they were tasked by their position. (d) Buying infl uence is the felony through which money or other benefi ts are claimed from a physical or legal person by another who has infl uence or leads them to believe they have infl uence over a public offi cer, in order to determine the latter to do or not do an act that is required by their place of employment. In order to respond to these challenges, the private sector must develop and implement mechanisms in order to prevent and reduce the probability of having such deeds occurring and in order to react in case they happen. The main instruments any company must have involve 5 : • Developing and implementing a zero-tolerance policy concerning corruption, based on legal regulations, and the values and principles of the company • Developing and implementing warning mechanisms that encourage employees to take notice of irregularities and corruption deeds within the company

3 Transparency International, URL: http://www.transparency.org/cpi2011/in_detail , accessed on March 26, 2013. 4 The World Bank Group, Helping Countries Combat Corruption: The Role of the World Bank , URL: http://www1.worldbank.org/publicsector/anticorrupt/corruptn/cor02.htm . 5 Transparency International, Resisting Extortion and Solicitation in International transactions. A Company Tool for Employee Training , URL: http://www.transparency.org/whatwedo/pub/ resist_resisting_extortion_and_solicitation_in_international_transactions .

• Developing and implementing special training programs for employees exposed to the risk of corruption • Developing and implementing policies regarding confl icts of interest • Developing and implementing policies regarding receiving gifts • Developing and implementing policies regarding donations and sponsorships, especially by political parties, but not limited to them

2.7 The Main Instruments that Ensure Evolving from Legal

Conformism to a Culture of Integrity

Compliance policies and procedures are those procedures developed within the company through which the company should align to the judicial norms, standards, regulations, and recommendations applicable to its activity, but also comply with the internal policies.

If we do not have a set of values—and do not live by them—the company will not be successful.— Daniel Vasella, Chairman and CEO, Novartis

2.7.1 The Mission Statement

A mission statement has the purpose of guiding a company’s actions, of stating precisely its general purpose. 6

2.7.2 The Code of Conduct

Conduct codes represent collections of obligations, many of them of legal nature, which a company’s employees must obey. Others have an extremely general character and concern the company’s values. However, these codes must not be value statements or double the law, but contain rules of a professional nature that offer the kind of professional behavior expected of the employees and management within the organization. 7 A company that creates a code of conduct with values and guiding principles will create for its employees a guide that will govern their decisions and actions both within the company and in relationships with third parties. The conduct code is a mechanism developed at a corporate level that contributes to corporate integrity.

6 Hill, Ch. & Jones, G. Strategic Management. Houghton Miffl in: New York, 2008, p. 11. 7 Transparency International Romania, Integritatea în mediul de afaceri din România , Bucharest, 2011, http://www.transparency.org.ro/politici_si_studii/studii/integritatea_mediu_afaceri/ StudiucIB.pdf .

2.7.3 The Ethics Training

In order to raise a company’s integrity, special attention must be given to trainings focused on the company’s employees, trainings through which the laws, values, and principles promoted by the company, and the applicable regulations for the employees’ activity are made known. This is probably the most important instrument in promoting a culture of integrity, for in this context employees and managers can talk, and mutually infl uence values and beliefs regarding the conduct expected of them. The beliefs and personal examples of managers are the best instruments to convince employees to follow their lead.

2.7.4 The Anti-bribery Program

A company that wishes to develop a culture of integrity among its employees will develop such anti-bribery programs. According to Transparency International’s standards, Business Principles for Countering Bribery , in developing an anti- bribery program, companies must:

1. mention the values, policies and procedures that are to be utilized in order to prevent bribery in all activities; 3. be in accordance with all the laws relevant for combating bribery in all jurisdictions where the enterprise develops its activities

Anti-bribery program

2. reflect the company's cultural particularities, by taking into consideration the risk factors, such as the business' nature, size, and location; 4. consult with employees, trade unions or other employee representative organisms

Confl icts of interest are oftentimes the starting point of corruption. —United Nations Global Compact Offi ce, Business against Corruption

2.7.5 Policies for Preventing Confl icts of Interest

Through the policy of preventing confl icts of interest, the business sector will try to avoid such situations as where an employee may have a personal interest of patrimonial or non-patrimonial nature through which fulfi lling their attributions in compliance with company’s policies and procedures may be infl uenced.

2.7.6 Integrity Awareness Policies

Whistleblowers can play an essential role in detecting frauds and malicious resource management and signaling corruption. They may often face consequences, even in the form of layoffs. Through the integrity awareness policies, companies encourage and motivate employees regarding signaling corruption deeds, or any infringements of the integrity compliance mechanisms developed and implemented within the company. Companies aim to develop an effi cient mechanism through which they encourage whistleblowers to signal cases of corruption or other infringements of the provisions of the integrity policies and procedures developed by the company. Moreover, the business sector aims to protect these people in cases where they can suffer direct or indirect consequences that follow complaints or reports they made in respect to lawbreaking. The instruments employees have in this respect can include a communication channel in the form of an email address, a phone number, or a special website ( ethics and compliance green line ) or a simple procedure for reporting the situations where the provisions of the ethical code have been broken. Employees must also be informed periodically regarding the results of such communications. 8

2.7.7 Developing Internal Warning Systems

The business sector must encourage establishing and utilizing internal warning systems, which are secure and easily accessible, ensuring a thorough, independent, and time-effi cient investigation.

2.7.8 Developing Informing and Awareness Mechanisms Regarding the Existence of Policies Regarding Integrity Awareness Among Employees

Companies must develop mechanisms through which they communicate to the employees their rights and obligations when they do their warning.

8 Transparency International Romania, Integritatea în mediul de afaceri din România , Bucharest, 2011, http://www.transparency.org.ro/politici_si_studii/studii/integritatea_mediu_afaceri/ StudiucIB.pdf .

2.7.9 Developing Protection Mechanisms Against Consequences

Companies must develop internal mechanisms that offer complete protection of the whistleblower against discriminatory treatment at the workplace and the consequences that come after their warning. The integrated ethics and compliance management imply coordinating all internal policies and procedures developed by the company in order to promote the culture of integrity.

Chapter 3 Corporate Transparency

A democracy requires responsibility, and responsibility requires transparency.

—Barrack Obama

The World Bank sees openness and transparency as being the keys for obtaining better results in developing and consolidating responsibility. Openness and transparency are corporate responsibilities we promoted through our own actions and leading activities in global level forums. —Jim Young Kim, the new President of World Bank, 2013

In a globalized economy, both national and multinational companies want, beyond their initial profi t targets, to keep businesses that, directly or indirectly, have been affected by the fi nancial crisis. From the numerous reports and studies made by different consulting companies and international organizations, one may notice that companies still don’t exhibit full corporate transparency, since they choose to report and publish insuffi cient information on how they carry out their activity. For instance, too few companies publicize their commitments and efforts regarding preventing corruption and fraud, and even fewer actually practice what they declare. The following chapter brings about the problem of corporate transparency as an answer and a solution for the corruption phenomenon that is manifested in the business environment. However, how does lack of transparency affect your company’s image? The answer to this question can take into consideration different aspects, from reputation and credibility to the fi nancial ones. A company that doesn’t prove to its investors that it is a business partner with integrity will lose its professional relationship with them, investments will lose safety, and the business’ sustainability will refl ect

© The Author(s) 2016 S. Văduva et al., Moral Leadership in Business, SpringerBriefs in Business, DOI 10.1007/978-3-319-42881-9_3 25

on its employees, through job cuts, but also on its consumers, who will no longer perceive the company’s services as being clean products. As society becomes more and more informed and technological, the market’s demands toward businesspersons will encounter different dimensions and standards. The global tendency will eventually push market players to act in compliance with the real needs of transparency and responsibility, starting from the consumer and up to society in general. It is everyone’s decision whether or not they choose a transparent conduct, but the business environment and the clients/consumers, the ones who make the rules of the game, will choose those who deserve to obtain profi t and remain competitive in the new economic background. Transparency creates the obligation of improving performance.

3.1 Trends and Landmarks Regarding Corporate

Transparency

Corporate transparency must be seen as a mirror, a window of the company, through which you can look from its interior toward the exterior, and vice-versa.

More and more companies talk about ethical behavior in the business environment and the transparency they manifest toward partners/shareholders/consumers and all other stakeholders. The concept of corporate transparency suggests the idea of openness, honesty, and visibility a company undertakes regarding its activity toward all actors it has contact with, from employees, partners, and shareholders, up to authorities, benefi ciaries/clients of the services they offer, and society in general. We will highlight the fact that when we talk about corporate transparency, we refer to ensuring the publishing of clear, pertinent, complete, and accessible information regarding various aspects of the business. Transparency must not be mistaken for communications or marketing campaigns, which, although they provide information on the company, do not meet simultaneously all the requirements mentioned above, as most of the time they focus on highlighting the positive aspects, without mentioning the less comfortable aspects for the company. At the same time, they have the purpose of persuading recipients, at times by manipulating them, regarding the qualities and benefi ts of the company’s products and services. Besides this understanding, well known and discussed in the specialized literature, we cannot omit to look at the normative part of this concept, whose references can be found in the main regulations, mentioned in the following part 1 :

1 (1) Directives on takeover bids (Directive 2004/25/CE), on transparency requirements for listed companies (Directive 2004/109/CE), on shareholder rights (Directive 2007/36/CE), on market abuse (Directive 2003/6/CE), and on audit (Directive 2006/43/CE). (2) European Commission (2011), Green Paper on EU Corporate Governance Framework, Brussels. Accessed: March 19, 2013: http://ec.europa.eu/internal_market/company/docs/modern/ com2011-164_ro.pdf .

European level National level • EU corporate governance framework (1) • The legislative part (the National Anticorruption Strategy for 2012–2015, the Law concerning trading companies no. 31/1990, Government Emergency Order no. 109/2011 regarding corporate governance in public enterprises)

• European Commission’s Green Paper—

EU corporate governance framework (2) • European Commission’s action plan (3) • OECD principles regarding corporate governance (4) • Position documents (BVB’s corporate governance code, the corporate governance code of the Romanian-American Commerce

Chamber, etc.)

We can therefore state that corporate transparency is, on one hand, a consequence of legal norms, among which the obligation of publishing information of interest to the external environment and stakeholders. In addition to this minimal requirements set by the law, the concept can encompass three fundamental dimensions, as seen in a recent study by Transparency International, Transparency in Corporate Reporting (Fig. 3.1 ):

Corporate transparency is an attitude that the persons in charge of a business choose to have toward the other players on the market and toward whom they express their respect and responsibility of doing things by the book.—Standard & Poor’s (2008) Criteria: GAMMA Scores, pp. 7–8

The rating agency Standard & Poor’s offers a defi nition of the notion of corporate transparency 2 in the GAMMA ( governance , accountability , management metrics , and analysis ) methodology, an instrument with the help of which companies are evaluated in several areas of interest, not only regarding their publishing annual reports. Therefore, transparency involves on-time revealing of appropriate information regarding a company’s fi nancial and operational performance, as well as corporate governance practices. A high degree of transparency means fi nancial

(3) European Commission (2012), Action Plan: European company law and corporate governance, Brussels. Accessed: March 19, 2013: http://ec.europa.eu/internal_market/company/docs/ modern/121212_company-lawcorporate-governance-action-plan_en.pdf . (4) Organization for Economic Co-operation and Development (2004), OECD Principles on Corporate Governance , Paris. Accessed: March 19, 2013: http://www.oecd.org/dataoecd/32/18/31557724.pdf . “We must change the way we do business by the application of the standards agreed on in the last decade, such as a global compact. Nevertheless, future prosperity will always be undermined by corruption, the taking of excessive risks, by lack of transparency and other unethical practices. These problems will only be solved by a more ambitious change of mentality among CEOs and of their rulings.”—Huguette Labelle, President of Transparency International, co-chairman of the World Economic Forum 2013 28 2 http://www.standardandpoors.com/servlet/bheadername3=MDt-type&blobcol=urldata&blobtabl e=MungoBlobs&blobheadervalue2=inline%3B+fi lename%3D081104_gAMMA_criteria-EngDOUBLEHYPHEN3.eadername2=content-Disposition&blobheadervalue1=application%2f pdf&blobkey=id&blobheadername1=content-type&blobwhere=1243909187366& blobheadervalue3=utf-8

Fig. 3.1 The fundamental dimensions of the corporate transparency concept according to Transparency International (Transparency International (2012), Transparency in Corporate Reporting: Assessing the World’s Largest Companies ; Berlin. Accessed on March 19th, 2013: http://www. transparency.org/ whatwedo/pub/ transparency_in_ corporate_reporting_ assessing_the_ worlds_ largest_companies )

PUBLIC REPORTING OF ANTICORRUPTION POLICIES (including those against giving bribery, emergency taxes, public contributions, whistleblowing policies etc.)

ORGANIZATIONAL TRANSPARENCY which targets information about subsidiaries, associations, shareholding etc. and which provides information related to organization's contracts and financial flows REPORTING FINANCIAL INFORMATION in every country where the company operates, which refers to the public's accessibility from every country to local financial information

reporting offers a good understanding of the company’s situation. Moreover, transparency concerns even non-fi nancial transparency, especially the one related to the company’s business operations and its competitive position. According to the rating agency, minimal transparency consists in publishing the names of the persons in charge of the company, their basic payment level, and the degree to which they are independent or not. In the Transparency in Corporate Reporting , 3 it is shown that, of the 105 multinationals monitored, which have subsidiaries in over 200 countries all over the world and whose turnover surpasses $11 T, over half do not publish information regarding anticorruption policies (68 %, unlike the recent study from 2009, when response rate was only 47 %). They do not publish information regarding organizational transparency, and reporting fi nancial information in every country the company operates has recorded a very low response rate. Also, we can take Denmark’s example. In the summer of 2012, they adopted a law requiring Danish businesses to publish their fi scal entries (paid taxes) on the offi cial portal, SKAT. 4

I believe our answer to the challenges we are facing must be built around three key- elements: transparency—being the new trust coin. Dialogue—confronting ourselves and engaging the interested parties. And yes—that word again; responsibility—setting standards in order to infl uence effi ciently our own operating environment —Helge Lund, CEO Statoil, 2012

3 Transparency International (2012), Transparency in Corporate Reporting: Assessing the World’s Largest Companies , Berlin. Accessed: March 19, 2013: http://www.transparency.org/whatwedo/ pub/transparency_in_corporate_reporting_assessing_the_worlds_largest_companies . 4 http://techpresident.com/news/wegov/23358/increase-corporate-transparencydenmark-makingcompanies-tax-records-available-online .

3.2 The Benefi ts of Corporate Transparency

The foundation of the future economy will be made of the following principles: a higher openness toward the global community and world in general, a better relationship/inclusion with an emphasis on tolerance, respect and fairness toward one another, a higher responsibility to bring values to the real economy and not destroy it. —Christine Lagarde, Executive of the IMF, 2013

Transparency ’ s effectiveness is given by the results and impact of the actions of everyone involved directly or indirectly in the organization’s activity. For each of the groups upon which companies’ activity is refl ected or with which the company is in contact, a number of advantages can be mentioned:

The company will benefit from a raise in credibility and responsibility among stakeholders, reporting clear and complete information. Corporate transparency instills trust in employees, and a reputation based on openness and transparency will attract those people (employees and partners) willing to respect the company’s ethical standards. Moreover, employees will feel appreciated and feel as if they belong to a larger family. For multinationals, the transparency of subsidiaries in every country where they operate will ensure increased efficiency in monitoring the impact on local economic development. Transparency creates profit and jobs, being a motor of society’s economy by supporting free markets and entrepreneurship.

Stakeholders will get to know their potential business partners better and gain trust in that company. If a company hides its debt, investors cannot estimate their exposure to the risk of bankruptcy and therefore will be reluctant toward that company. It is good to know that before making any investment, those pursuing business in a country/region will “inspect” the local climate and the way in which it infl uences the business environment. Therefore, transparency diminishes risks and uncertainties, as well as corruption and bribery opportunities. A business environment of integrity is created, for instance, through the existence, and more than that, by the implementation of a code of ethics through which the organization will express its attachment toward a responsible and transparent behavior on behalf of the other people/organizations it has contact with. It also creates longlasting professional relationships. When there are cases of fraud in a company caused by an employee/manager, that company’s image will be hurt in front of other stakeholders and shareholders. If there had been transparent mechanisms of reporting the fi nancial situation, along with warnings from employees who knew the situation, and control measures on behalf of the shareholders, maybe the scandal would not have gotten that big. Citizens/society : we live in the era of Facebook and YouTube, and any violation of the citizens’ rights or the discovery of irregularities or compromising information about a company will immediately lead to negative publicity and, evidently, the company’s loss of credibility. This sanction will have repercussions on profi t and possible business partnerships.

CORPORATE TRANSPARENCY

Company’s Advantages: Credibility Responsibility Reputation Profit Jobs Sustainability Stakeholders’ Advantages: Secure investments Known risks Business partners with integrity Profit Sustainable professional relationships Citizens’/society’s Advantages Loyalty toward company’s services Trust Loyalty Products/services/wor ks perceived as “clean” Increase of the

Fig. 3.2 The advantages of corporate transparency

Credibility is proof of behavior in accordance with the undertaken principles. As Daniel Dăianu declared in an interview, 5 the social context and interactions with it are very important for a company that aims for good long-term economic results, seeing transparency as a form of social relationship. In other words, in a time when markets are continuously changing and products aim to be similar, quality makes the difference. Therefore, the relationships with the exterior can constitute a decisive factor in the business environment (Fig. 3.2 ).

In order to gain people’s trust, we emphasized our transparency and openness. —Richard Branson, founder and CEO of Virgin Group, 2010

3.3 Challenges Raised by Corporate Transparency

Market abuse is a felony that causes victims. By distorting market prices, using privileged information abusively and market manipulation undermine investors’ trust and the market’s integrity. By broadening and consolidating the legislative framework, expanding competences, and hardening sanctions on the regulation authorities have, the measures proposed today will offer them the instruments in order to ensure markets’ fairness and transparency. —Michel Barnier, European Commissioner for internal market and services

5 Dăianu, D. (2007), Transparenţa companiilor ca formă de relaţionare socială ( The Transparency of Companies as a Social Relationship ) In CSR-Romania . Accessed: March 19, 2013: http://www. csr-romania.ro/articole-si-analize/transparenta-si-credibilitate-in-csr/479-transparena-companiilor-ca-form-de-relaionare-social.html .

• The issue of company ’ s data privacy and potential information security issues : because too much information is made public, there is the danger of releasing information of internal interest for the company’s management. Risk factors target information leaks due to technology security and human capital. 6 These information leaks can have external causes (online hacks) and internal ones (software vulnerabilities and employee behavior). • There is also the fear of revealing business secrets , which will lead afterward to competition being better informed, which could generate the loss of a company’s competitive advantage. • Using privileged information in order to unilaterally raise profi t, to the detriment of the company’s public interest. Through the concept of privileged information is understood any information with precise character that have not been made public, directly or indirectly connected, which, in case of being made public, would most likely have a signifi cant effect on the price of shares or of other goods and services provided by that company . Transactions based on privileged information are those transactions that break the principle of transparency and complete character of information, in which information has not been made available to all investors with the purpose of obtaining unfair profi t by a certain investor. A company that promotes the culture of integrity will see that its relationships with partners follow the principles of transparency and full content of information and will provide complete, transparent, correct information so that its partners can make independent and informed decisions. A company characterized by integrity is that company which will not try to obtain privileged information in order to make unfair profi t. Some companies see this openness as a collective effort that companies in an industry should make for the benefi t of the public interest. In order to counter all these fears, there must be a balance in what a company chooses to declare about its business strategy and how it works as a system: every top manager is free to manage the whole process of transparency.

3.4 How to Counteract Fears and Win

You cannot build a reputation on what you intend to do. —Henry Ford, founder of Ford Motor Company

The external perception of the company will prove the fact that authentic and complete transparency will reduce the risk of rumors and will not leave room for interpretations. Doubts connected to your business will lose their any grounds when

6 Market Watch Journal (2012). Scurgerea datelor confi denţiale din companie, între vulnerabilitate umană şi implementarea politicilor de securitate , no. 145, May–June 2012; accessed: March 19, 2013: http://www.marketwatch.ro/articol/10925/Scurgerea_datelor_confi dentiale_din_companie_ intre_vulnerabilitate_umana_si_implementarea_ politicilor_de_securitate/ .

Repeat cycle

Step 6: reporting the results

Step 1: understanding the context Strategic plan

Step 2: setting the strategic direction

Check

Step 5: evaluating and applying the possible corrections

Step 4: measuring the results

Step 3: implementing the strategy

Fig. 3.3 Planning the transparency process

you move from declarations to action, and not when you avoid or omit information considered relevant for the stakeholders. In the guide Transparency: A Path to Public Trust of the Initiative for Global Environment Management, 7 every step of a company’s transparency process is analyzed in detail. Therefore, a well-planned approach will ensure turning all opportunities into certainties and reduce the risk generated by unpredicted challenges. We will present starting with this study only the planning of this complex process, as seen in the following diagram (Fig. 3.3 ).

In economic terms, we support the opinion according to which transparency must not be perceived as a cost the organization should have, but more like a long-term investment.

The same author considers transparency an aptitude, part science, part art, requiring conscious efforts in order to develop it. —Linaweaver, Stephen (2010), Super Bowls and Floor Mats in the Age of Transparency

Step 1 : Understanding the context involves gathering the necessary information in order to ensure transparent conduct—the company’s mission and principles, strengths and weaknesses, and opportunities and business threats and the stakeholders’ expectations. Step 2 : Setting the strategic direction through which the company defi nes its measurable objectives according to its unique needs, as well as the actions that need to be taken.

7 The Environmental Management Initiative—GEMI) (Global Environmental Management Initiative (2004), Transparency: A Path to Public Trust , Washington, p. 13; accessed: March 19, 2013: http://www.gemi.org/resources/transparencypathtopublictrust.pdf .

Steps 3 and 4 : Implementing the strategy and measuring the results involve taking the necessary measures in order to apply the previously adopted strategic plan. Step 5 : Evaluating and applying the possible corrections according to the changes encountered in the process. Step 6 : Reporting the results is the last step of the process, after which the cycle will be repeated.

3.5 Essential Requirement for Effective Transparency:

The Information Provided by the Company Are Relevant and Pertinent for Its Stakeholders

Higher transparency is an unstoppable force. This is the product of increased demands from those who have a common interest for the company—its stakeholders—and of the rapid technological changes. Above all, there is the spread of the Internet, which makes it much easier for the fi rms to provide information, and much harder to keep secrets. […] higher transparency will bring more responsibility and a better corporate behavior. —Don Tapscott, President of nGenera Insight

From the very beginning of a business, its manager/managers should have in mind the following question: What do others want to know about me? This information is essential for improving your company’s performance, leading in time to its credibility and sustainability (Fig. 3.4 ). Misinforming or incompletely informing clients can severely cost the organization, not just in fi nancial terms. Neither does selective informing present fewer risks. The following scheme will clarify what a company should take into consideration when it wants to improve its performance and be aware of the difference between selective and total transparency (Fig. 3.5 ). Last but not least, it must be mentioned that stakeholders expect a proactive attitude from the companies in what concerns transparency, which is why it is recommended for them to provide as much information as possible, using means and formulations accessible to the audience at large and not only marketing campaigns. As it is known, every company that operates in this continuously changing economic global market has its own way and strategy of conducting business, the so- called secret or key to success. From own experience, acquired, or heard knowledge

Identifying the significant stakeholders and their expectations

Understanding the type of commitment/relationship between the company and each stakeholder

Fig. 3.4 Steps to be taken in order to know your stakeholders

Identifying relevant information for each stakeholder and reporting them

-Transactions with the parties involved -Predictable risk factors

- Remuneration policy for BD’s members and key-executives -Qualifications and the process of selecting of BD members and keyexecutives

- Company’s missions and objectives -The board ofdirectors

-Audit reports -GMS decisions

- Reports concerning BD’s obligation to inform the shareholders -Information regarding the entire manufacturing process (location, workforce, wage policy - Company’s anticorruption policies (including against giving bribery, political contributions, whistleblowing etc.) -The content of corporate governance’s code/policy and its application -Key Performance Indicators -How involved stakeholders are

in the decision-making process

Fig. 3.5 The main information reported leading from selective to total transparency

or practice exchanges with other companies within the industry, all organizations that managed to maintain their business afl oat during the economic crisis could be labeled as winners. The transparency we talked about up to this point does not necessarily involve revealing this success recipe, but it is preferable that companies’ responsibility of showing openness and interest to all others it has contact with and those on whom the company will have an infl uence upon will not be less important than trading success.

3.6 Transparency Regarding the Efforts of Infl uencing the Public’s Decision

The activity of infl uencing the public’s decision by an organization can be materialized through different instruments and techniques, used complementarily or individually, according to the targeted decision-maker and the strategy used. Among the main instruments used in infl uencing decisions for the benefi t of an organization or group of organizations, there can be mentioned: 1. Participating to decisional transparency procedures practiced by the decision- maker on the basis of Law no. 52/2003 2. Using the right to access information of public interest on the basis of Law no. 544/2001, as a means of persuading public decision-makers 3. Using social dialogue as an instrument for creating critical mass and persuading decision-makers

4. Advocacy and lobby practices If the fi rst two instruments are clearly regulated through normative acts with considerable age and target the organized framework in which a company can get involved in the decisional process, the third one still raises disputes regarding the nature of the social partners taken into consideration, and the fourth is still shadowed by negative connotations. In this way, organizations’ using the fi rst three instruments is a clear statement toward openness and transparency, where organizations promote their interests with the help of the means and ways established by the law, in an organized setting.

3.7 Social Dialogue

Social dialogue represents a process of continuous interaction between social partners, with the purpose of determining a mutual agreement on the control of certain economic and social variables, both at macro and micro level. In a broad sense, social dialogue represents all forms of two or three parties’ dialogue, negotiations, or consultations regarding social issues. It takes place at any level of the society, nation, industry, or enterprise, involving employers (or their organizations), employees (organizations or their representatives), authorities (represented according to the level where the social dialogue takes place), but also by the civil society interested in the social areas (Fig. 3.6 ).

•Unions

Employees •Owner

Employers

Civil society Goverment

•Associations •Foundations •Professional organizations •Universities

Fig. 3.6 The actors of the social dialogue

•Ministries •Decentralized authorities •Local adminstration

3.8 Lobby Versus Advocacy

When it comes to lobbying and advocacy, things are much more nuanced due to both the lack of regulation/a minimal regulation concerning this aspect, and to the less open setting in which these actions are conducted. Through the process called advocacy is understood the attempt of infl uencing the public’s decisions and the manners of allocating resources in favor of causes of moral, social, economic, or other natures, or for protecting common legitimate interests. The attempt to infl uence public decisions is made for the benefi t of as large as possible a range of citizens, having on the agenda strictly their interest, without trying to obtain profi t or personal interests based on the policies that result from the process. The main distinction between lobby and advocacy is that the notion of advocacy implies a more thorough process of exerting pressure on the decision-makers through a more complex campaign. It involves public communication, awareness, obtaining stakeholders’ support, etc., while lobbying only involves trying to directly persuade the decision factors (i.e., through meetings face-to-face, so points of view or political meetings may be discussed). In essence, both are forms of persuading a decision-maker in order for one to obtain certain results relevant for the group that engages in the activity. The differences consist in the instruments used, in the way in which the representation work is perceived, and any kind of contact with the decision-makers. There are voices that state that the lobbying activity is nothing more than a special type of advocacy. It is possible that the etymology of the two terms will help. For instance, advocacy , as it is easy to presume, comes from advoco , advocare , advocatus , which in Latin means summoning one to court , or literally to give voice in defense , thus appealing to someone who will represent your interests in front of judges. Unlike advocacy, the term of lobbyist initially referred to those reporters in the lobby of the House of Commons from Great Britain’s Parliament, needed in order to speak with their representatives. In order to make as clear as possible the differences between the two terms, we will present the characteristics of each 8 :

Lobby Advocacy 1. The activity of a specialized or non- specialized organization, involving fi nancial or material benefi t for the organization lobbying or for an organization in the name of which lobbying is made 1. Activity done by any kind of organization, without implying a fi nancial or material benefi t for the ones involved in the activity

2. Based on the principles of free association and appeals to any kind of communication and persuasion instruments, in the absence of a setting or clear instruments 2. Based on the principles of participative democracy, appealing to instruments such as public consultations, public dialogue, etc.

(continued)

8 See Lobby-ul în România . Policy Paper; Transparency International România, Bucureşti, 2012. Point 4 is taken after the cited public policy.

Lobby Advocacy 3. Promotes the legitimate interest of an organization or small community 3. Promotes the public interest

4. It involves mainly direct contact with the lawmaker or any public offi cer involved in the legislative process.

4. It involves both direct contact with the lawmaker or any public offi cer involved in developing public legislation and mediated contact, such as: Instruments used: • Comments on public proposals • Elaborating technical documentation • Petitions • Directly addressed correspondence • Demonstrations • Meeting face-to-face and initiating informal contacts in receptions • Public statements • Work visits • Press conferences and any communication instrument (i.e., press release)

• Dialogue sessions and professional conferences • Media campaigns • Public letters

5. It is inclined more toward negotiation, collaboration 5. It is based mainly on formulating conditions regarding the development, altering, or quitting a public policy or legislative proposal

3.9 Models and Current Lobby Regulations

Lobby practice was founded in the United States, when, during a speech given in the Congress of the United States on March 2, 1956, John F. Kennedy stated that

lobbyists are in many cases expert technicians and are capable of explaining complex and diffi cult subjects in a clear, intelligible manner. They are engaged in personal discussions with the members of the Congress, where they discuss in detail the reasons for the position they support. Because our representation in the Congress is based on geographical borders, lobbyists that speak for different economic, commercial, or functional interests of this country serve a very useful purpose and undertook an important role in the legislative process.9

There are currently two major lobbying systems in the world : the American one, which provides total transparency concerning lobbying activities, its fi nancing, and the persons involved, but also drastic sanctions for the members of the public institutions, either elected or employed, if they offer support during their work mandate/ contract. In addition, sanctions take place in case they try to infl uence public decision for a period of 2 years after leaving their position. The European lobbying

9 Senator John f. Kennedy, To Keep the Lobbyist within Bounds ; in New York Times Magazine , February 19, 1956, pp. 40–42—in Congressional Records March 2, 1956, vol. 102, pp. 3802–3803.

system, in an incipient phase, involves the existence of an interinstitutional agreement through which the Transparency Registry10 was created, a conduct code applicable to those who declare their interests in the Transparency Registry in their relationship with the EU institutions and its members and a mechanism of undertaking all complaints against those entered in the Registry. Another major difference between the two approaches is that in the United States lobbying activities are heavily taxed, organizations that have lobbying activities being required to declare them according to the American Fiscal Code , 11 and the expenses for these activities are non-deductible (USC 1612). 12 In Europe, on the other hand, there is no such tax system for lobbying organizations, their regime being the one applicable in the country they come from. However, lobbying in the United States includes any organization that, in written or verbally, tries to infl uence the public decision of a third party (called a “client”) in order to “formulate, modify or adopt a federal law.” This is also true in the case of organizations lobbying in order to “formulate, modify or adopt a rule, regulation, governmental order or any other program, policy or position by the Government of the United States” ( Lobbying Disclosure Act, 8 ( A )). In other words, in the United States, the activity that trade unions and owners have is included among the activities that a public affairs company, for instance, does for a corporate client in order to formulate, modify, or adopt a certain public decision. Unlike this case, in Europe, the European Commission excluded from the lobbying activity the social dialogue undertaken by companies, trade unions, or employee associations and professional consulting activities, solicited directly to physical persons by the EU institutions or its members or by a third party who needs services in order to benefi t from a fair process/administrative procedure ( Institutional Agreement, art. 10 ). In addition, churches and religious communities, political parties, and local, regional, and municipal authorities are excluded from the list of organizations that must register in the Transparency Registry.

3.10 About Lobbying with Distrust

The current economic and politic context both national and international makes the lobbying notion be associated many times with the lack of integrity, with representing illegitimate interests through diverse means, with corruption scandals that affect the private environment, politicians, and public institutions. This happens because there are serious doubts regarding the fact that the ideas put on the table by organizations that are lobbied for do not represent anything else than their desire to maximize profi t by all means, including by twisting the public interest and legislation, without presenting fair interests with positive implications. On the other hand, the

10 http://europa.eu/transparency-register/ . 11 See USC, chapter 26, Disclosure of Lobbying Activities : http://www.law.cornell.edu/uscode/ text/2/chapter-26 ) USC §1610: http://www.law.cornell.edu/uscode/text/2/1610 . 12 URL: http://www.law.cornell.edu/uscode/text/2/1612 .

lack of trust toward the area of lobbying is notorious at a global level. Siim Kallas stated the following in July 2007:

Lobbying can be also unproductive. It is actually harming for the society overall if it is destined to obtain special political privileges or rights. Lobbying becomes “unproductive” when the moderation of a favorable legislative environment is “cheaper” than investing in means of more productive manufacturing. If the money is spent on lobbyists rather than, for instance, on research and development or on efforts of compliance with the accepted rules, then we must all be worried.13

At the same time, the economic crises only managed to raise the level of distrust, and at the European level, the American lobby model is today associated with infl uence traffi c. The Criminal Law Convention on Corruption signed in Strasbourg in 1999 and ratifi ed in Romania in 2002 through law 27 14 incriminates as felony under article 12:

(1) The promising, giving or offering, directly or indirectly, of any undue advantage to anyone who asserts or confi rms that he or she is able to exert an improper infl uence over the decision-making of any person referred to in Articles 2, 4 to 6 and 9 to 11 in consideration thereof, whether the undue advantage is for himself or herself or for anyone else, as well as (2) The request, receipt or the acceptance of the offer or the promise of such an advantage, in consideration of that infl uence, whether or not the infl uence is exerted or whether or not the supposed infl uence leads to the intended result.

The requirement mentioned by this article is for the “act to have been committed intentionally,” in other words, for the one that proposes, offers, or gives bribery, to be aware of having done so. And this kind of behavior is clearly directed toward determining a certain decision through an immoral act: lack of morality consists on the one hand in the fact that the decision the decision-maker must take is determined by obtaining “unmeritorious benefi ts,” not by the public interest he has to serve. On the other hand, it is immoral because the decision-maker is paid twice for the same work, once for fair reasons and once beyond the legitimate retribution.

According to the new criminal code of Romania, infl uence peddling is defi ned as: claiming, receiving or accepting the promise of money or other benefi ts, directly or indirectly, for one’s self or for another subject, made by a person who has infl uence or leads to be thought he has infl uence on a public offi cer and who promises to determine him to fulfi ll or not fulfi ll, to speed up or delay an act which is in his/her job duties or to act contrary to these duties. Art. 291

Still, not all the activity of infl uencing the public opinion through persuading instruments like advocacy/lobby can be seen a priori as infl uence peddling. In other words, having all the work of specialized organizations’ representing legitimate interests of a company be perceived as a criminal act without taking into consideration the way in which it is done and what interests it serves. If we were to accept such a defi nition, then we would refuse companies and its representatives their legal

13 Siim Kallas, The European Transparency Initiative; Press Release RAPID (SPEECH/07/491), accessed on March 19, 2013: http://europa.eu/rapid/press-release_SPEECH-07-491_en.htm . 14 In Romanian: Legea pentru ratifi carea convenţiei penale privind corupţia , adoptată la Strasbourg la 27 ianuarie 1999, publicată în Monitorul Ofi cial, partea I, nr. 65, 30 ianuarie 2002.

right to petitioning and solving petitions provisioned through OG 27/2002, which guarantees this right not only to physical persons, citizens ( art. 1, paragraph 1 ), but also to legally constituted organizations, these being allowed to petition in the name of the collectives they represent ( art. 1, paragraph 2 ).

3.11 Transparency: The Key to Rehabilitating the Notion of Lobby

To consider that lobbying or advocacy are incorrect and/or illegitimate ways of representing someone’s interests just because there were countless cases of actions behind closed doors is wrong. Fair lobbying also exists, and the moral obligation of companies that appeal to lobbying is to be transparent regarding their actions, both them and those that represent them. Transparency is the simplest and most available way for companies to prove that their interests are legitimate. Moreover, transparency in direct or indirect lobbying, through specialized organizations, does not require costs in implementation, because the annual reporting structure is already in place, nor in terms of negative reactions from the population, since these actions try the same thing—to determine a positive attitude from the stakeholders. Transparency, as we are referring to here, is not that of the organization that is lobbying, but of the one that solicits the services. It is the case of companies that attempt legitimately to promote their private interest, which are in agreement with the public interest. For several years now in Romania, companies in the Romanian tobacco industry asked the Romanian authorities to put in more efforts in order to stop traffi cking, small or large, of cigarettes from the outside, especially from the Republic of Moldova. The lack of funds of the Romanian border police made impossible the necessary equipping of troops with trained dogs. In order to support the authorities, companies exhausted on the one hand by cigarette traffi cking and tax increases took the decision of lobbying so that the border police would receive dogs trained in spotting tobacco, and a part of the costs were supported by them. The companies’ private interest is obvious, stopping tobacco traffi cking, but it is also a public interest, because cigarettes reaching the population endanger consumers’ life. Therefore, even when there is a legitimate interest, if lobbying actions take place behind closed doors, there is the major risk for the public perception to be a negative one. At international level, The Organization for Economic Cooperation and Development (OECD) adopted in 2010 a set of principles that member countries are obliged to apply nationally in terms of transparency and integrity in lobbying. OECD’s recommendation is addressed to decision-makers in the executive area, but it also requires simple measures from the legislative one, which these can adopt in order to eliminate suspicions regarding allegations of their illegitimately infl uencing stakeholders through lobbying.

1. Building a fair and effective setting for openness and access (a) Countries should provide an ongoing space by assuring the equitable and fair access of all stakeholders to the development and implementation of public policies (b) The rules and guiding principles regarding lobbying should refer to concerns toward the governing in lobbying practices and respecting the sociopolitical and administrative contexts (c) The rules and guiding principles of lobbying should be consistent with the policy and larger legislative frameworks (d) Countries should defi ne clearly the terms of lobbying and lobbyist when taking into consideration development or when they develop rules and lobbying guidelines 2. Improving the level of transparency (e) Countries should ensure an appropriate level of transparency in order to make sure that public offi cers, citizens, and company representatives can obtain enough information on lobbying activities (f) Countries should facilitate stakeholders—including the organizations of the civil society, companies, media, and the public—the possibility of analyzing lobbying activities 3. Encouraging a culture of integrity (g) Countries should encourage a culture of integrity in public organizations and in adopting decisions by offering clear rules and guidelines regarding public offi cers’ behavior (h) Lobbyists should comply with the standards of professionalism and transparency, having also the responsibility of encouraging a culture of transparency and integrity in lobbying 4. Mechanisms for an effective implementation, compliance, and revising (i) Countries should involve key actors in the implementation of a spectrum of coherent strategies and compliance practices (j) Countries should periodically revise the way laws and lobbying recommendations work and operate the necessary adjustments in light of their experience

Lobbying is not regulated by legislation in Romania. Still, progress has been made at professional level. First, we are talking about the introduction in the Romanian Occupations’ Classifi cation Registry (ROC) of the profession of specialist in lobbying (lobbying specialist) (position 243,220):

Lobbying is the legitimate infl uencing of public decisions, through communication activities professionally made, which involve legislative expertise, discursive techniques and strategic abilities.15

Acknowledging and registering this job are the results of the efforts of the Romanian Lobbying Registry Association, 16 an NGO constituted by the representatives of trading organizations that undertake lobbying activities in Romania. The purpose of this association is to implement a conduct code among entities that practice lobbying and to develop a lobbying registry similar to the one at the European Commission. Here, both physical and legal persons that undertake lobbying projects will report transparently on their activity and contribute actively in raising trust in the lobbyist work and profession.

15 ROC. Occupational standard: lobbying specialist March 22nd 2012; accessed: March 26, 2013: http://www.anc.gov.ro/so/r/SO_SPECIALIST_LOBBY.pdf . 16 For additional details check the organization’s website: www.registruldelobby.ro .

From the perspective of the Romanian Lobbying Registry Association , lobbying is defi ned in two ways: in a broad sense, it represents the sum of actions designed to create an opinion currently favorable to a change . In a narrow understanding, in the one of profession, it is defi ned as the sum of actions developed by interest groups or their representatives through legal and legitimate methods, activities undertaken with the purpose to infl uence formulating policies and making decisions within public institutions.17 It must be noted that the exercise of transparency is, in essence, an exercise of openness and legitimization. It brings with it a series of benefi ts, both for the company directly and for the environment where it operates: • Ensuring loyal market competition and preventing cartelization • Promoting multi-stakeholder dialogue—involving companies, the civil society, authorities, unions, employers, and the community • Increasing public trust in the company • Increasing the employees’ trust in their own organization and supporting a culture of integrity • Preventing reputational risks for situations where the company might be accused of illegitimate interests

In order to facilitate the process of legitimizing lobbying, we suggest following the steps described below. They were developed by ICCO, a Dutch NGO, in a 2010 document titled Guidelines on Lobby and Advocacy . 18

Step 1 •Clarify your organization's interests, and those of the network or coalition you represent

Step 2 •Define the target group: whom and what interests does it serve?

Step 3

Step 4

Step 5 •Set SMART objectives for lobbying and advocacy: what can you really obtain?

•Identify decision-makers: whom do you want to influence, what are their interests, whom do they represent and what are the decision procedures?

•Make sure the organization, network or coalition you represent has all the necessary internal mechanisms in order to support transparent and fair lobbying and advocacy

Step 6 •Identify the stakeholders. Evaluate the risks and their impact on them

Step 7

Step 8 •Verify if lobbying and advocacy are the most appropriate instruments for your objectives

•Develop a lobbying or advocacy plan which contains responsibilities and deadlines for the activities it contains

Step 9 •Implement the lobbying or advocacy plan

Step 10 •Monitor, evaluate and do the follow-up lobbying and advocacy activities in order to measure the impact

17 Find these defi nitions on the Association’s website, at: http://registruldelobby.ro/conceptul-delobby.html . 18 http://www.icco.nl/nl/linkservid/383429B4-95A1-c927-fD8639f875DE8D7A/showMeta/0/ .

The ten steps are actually a reiterative process. They must be retaken until the objectives are met.

3.12 Recommendations for Excellence

We must change the way we make business by applying the agreed upon standards of the last decade, such as UN Global Compact. Still, future prosperity will always be undermined by corruption, taking excessive risks, the lack of transparency, and other unethical practices. These issues will be solved only by a more ambitious mentality change among CEOs together with their regulations. —Huguette Labelle, President of Transparency International and co-Chairman of the Global Economic Forum 2013

1. Elaborating clear and transparent internal policies and procedures applicable to the whole process of a company’s activity (conduct codes, standards, etc.) 2. Doing trainings for employees on the subject of transparency 3. Publishing fi nancial and auditing reports 4. The continuous implementing and updating of a company’s website, so all information may be posted there (information must be presented so as to be easily understood, up-to-date, so as to provide a comparative image of the company’s situation, a balanced presentation of the company’s performance, and to be verifi able), at least all information of interest for the external environment of the company. This website should be the minimum communication standard of every company. It is preferable for it to be translated in languages of international circulation 5. Involving stakeholders in a real dialogue where precious information will be provided to both sides, developing responsibility for improving the performance of business 6. Public undertaking of errors and mistakes as part of the process of improving the quality of the services the company offers 7. Communicating the potential risks the company can present for future partnerships and the actions undertaken for diminishing and combating these risks Trust and transparency these are the two relevant words for any manager concerned with the image of the brand projected toward the stakeholders. We may notice a global trend of aligning to the standards and practices undertaken and applied by the big market “players.” Competition is the one that will make others align to these standards; it is only a matter of time until this takes place. On their relationship with the stakeholders, it is not enough for the organizations/ companies to communicate various information about how they work, but more important are the usefulness and need for such information, expressed by those interested. In order to know what is relevant for the external environment of your company, the necessity of effective stakeholder management is crucial, be they either direct or indirect stakeholders.

In what concerns advocacy/lobbying, it becomes clear that continuously watching the process described in the previous section helps eliminate the practices of writing legislative proposals behind closed doors, without public consulting, which end up being adopted by emergency orders. It is essential for the legitimacy of the company’s interests that such situations do not exist, even when a lobbying organization’s expertise is called in. Engaging stakeholders in the lobbying that companies do allows them to prove to decision-makers that behind these initiatives is not just a man, an organization, or a small number of individuals but a public will. In addition, lobbying leads to eliminating political parties’ fi nancing, a thing that closes the circle of confl icts of interest within companies, parties, and governmental teams. By involving stakeholders in lobbying, companies eliminate in fact the power which politicians oftentimes manifest on decision-makers and companies. Stakeholders play the role of precaution measures for the legitimacy of lobbying. Not lastly, lobbying must be done by following particular interests but to the degree in which these do not run contrary to the public interest.

Chapter 4 Stakeholders’ Management

As shown in the previous chapters, the fi rst steps for a company to be considered responsible are to have effi cient internal mechanisms of compliance and an ethics’ management and to publish transparently and voluntarily as much information regarding its activity as possible. However, the company’s activity does not exist in a void, but it is part of a complex system, from a social, economic, environmental, etc. point of view. It is also inevitable for it to affect the interests of other people or groups, as the company certainly is, in turn, affected by the actions of other companies. Let’s imagine, for instance, the hypothetical situation of a company from the industrial sector, which owns the elements of environment protection requested by the law. In theory, this enterprise has given proof of the necessary responsibility in order to minimize the impact of the emitted pollutants on people. Still, environment protection organizations contact management in order to complain regarding the factory’s emissions, in that recent studies have shown it severely pollutes the air and can cause respiratory diseases among those living in the area. Considering it an exaggeration and knowing they are taking all security measures, management refuses to take into consideration the repeated requests of eliminating the harmful compound from their manufacturing process. Five years later, a signifi cant percentage of the town’s inhabitants have developed serious respiratory diseases, even pulmonary cancers. They hire a lawyer that, with the support of the environment protection organizations, launches a collective trial against the company, proving the conditions are a consequence of the harmful substance emitted by the company and the fact that the management was aware of the possible effects the substance could have on health. After the trial, the company is forced to pay astronomic damages, and its activity is ceased until the situation is solved. The question is how would you feel if you were part of the management of that company, responsible for peoples’ diseases and for the fi nancial and image loss derived from the situation? Even worse, how would you feel if your parent or child were one of the patients? The situation analyzed was a random, hypothetical one, but there have been countless cases in reality. Each of these highlighted the importance of proper stakeholder management, proving that in the absence of a real responsibility for the fate of those

© The Author(s) 2016 S. Văduva et al., Moral Leadership in Business, SpringerBriefs in Business, DOI 10.1007/978-3-319-42881-9_4 45

affected by the economic activity of a company and without having an honest dialogue with them, one cannot speak of ethical business, regardless of how much effort is invested in the internal mechanisms. In addition, we will be presenting in this chapter step-by-step what good stakeholder management consists of and how it must be done so that your efforts of running an ethical business be successful.

4.1 Who Are, in Fact, the Stakeholders?

The one who will use his or her abilities and constructive imagination in order to see how much he can give in exchange for a dollar, instead of thinking how little he can give in exchange for a dollar, will certainly succeed.— Henry Ford, Founder, Ford Motor Company

From shareholders, employees and suppliers, clients, activists, communities, NGOs, and, not in the least, the government, all these entities can be at the same time a company’s stakeholders. But since the interests of these categories do not always coincide (they are sometimes even contrary) and the resources an enterprise can allocate for satisfying their wishes are limited, there must be a stakeholder hierarchy, varying according to their importance. Therefore, a fi rst classifi cation will split them between primary stakeholders, or those involved directly in the company’s activity (shareholders, employees, suppliers, clients), and secondary stakeholders, who, even though they infl uence the activity, are also infl uenced by it, and their involvement is not a direct one (media, NGOs, etc.). In addition to these, there are public stakeholders, represented by the state’s institutions that organize and administrate the legislative framework within which the company operates. Another classifi cation refers to how important the stakeholders are for the company’s existence. Therefore, core stakeholders are those without whom the company cannot survive (usually the primary ones). Strategic stakeholders have a different importance for the company in a certain moment, depending on the existing opportunities and threats. Not lastly, environmental stakeholders are those that exist in the environment where the company operates, without them being among the core or strategic stakeholders. Stakeholders’ prioritization is done fi rstly on a set of attributes that targets the degree to which these have the right of formulating expectations regarding the company’s activity, the pressure they can put on having those expectations fulfi lled, and the speed with which the company must answer their requests. These three attributes are legitimacy, power, and imperativeness . A stakeholder can possess all these attributes at the same time, a combination of two of them or only one of them, but when the stakeholder has none, he/she becomes irrelevant for the company.

Stakeholders’ relevance will correlate positively with their cumulative number of attributes—power, legitimacy, and imperativeness—perceived by managers.1

1 Ronald K. Mitchell, Bradley R. Agle, Donna J. Wood (1997), Toward a Theory of Stakeholder Identifi cation and Salience: Defi ning the Principle of Who and What Really Counts , The Academy of Management Review, Vol. 22, no. 4 (Oct., 1997), pp. 853–886.

Therefore, the types of stakeholders to whom the enterprise must give maximum attention are those that have legitimate, imperative claims and the power to impose them. On the other hand, there are those who only have one attribute. According to this classifi cation, stakeholders can be split in the following way:

Power

Imperativeness Legitimacy

Latent stakeholder

Non-stakeholder

Dangerous stakeholder Dominant stakeholder

Demanding stakeholder

DECISIVE

STAKEHOLDER

Dependent

stakeholder Discretionary stakeholder

4.2 Stakeholders’ Management Theory

Although the basic ideas of this theory emerged, under various forms, starting with the 1960s, the stakeholder term was introduced in the economic language by Edward Freeman in his paper, published in 1984, Strategic Management: A Stakeholder Approach . 2 The author utilized this concept in order to highlight the difference between the new approach that he proposed and the existent one, within which the main and oftentimes sole responsibility of a company was toward its shareholders. In time, the stakeholder term was defi ned in many ways, according with the broadness the authors granted, but Freeman provided the most common approach: Any kind of

2 Freeman, Edward, 1984— Strategic Management: A Stakeholder Approach ; Pitman, Marshfi eld.

individual or group that can affect or is affected by the company meeting its targets (Freeman, 1984). Its theory wishes to express the fact that in order for a company to call itself ethical and responsible, it must not limit to only playing by the rules in its own perimeter. Following the rules and ethic codes within the business is a good start in order to obtain this status, but no more than that. As long as people or groups are still affected directly or indirectly by the company’s activity, and its management chooses to ignore that, it cannot be the case of responsibility or morality.

One of the clear trends we observe is that we are pushed to involve the community in developing next-generation applications. Transparency regarding our plans allows us to obtain better feedback, so as to be able to offer better solutions to our clients. —Shantanu Narayen, CEO Adobe Systems

It is about satisfying our shareholders’ expectations while managing the social responsibilities and taking care of the environment. This is not a rectilinear and simple process. In order to progress substantially, we need to analyze carefully the soil conditions, to plan in detail, and execute carefully. —Herbert Hainer, CEO Adidas Group

In the next decade, the most successful companies will be the ones that integrate sustainability at the core of their business. —Jim Owens, CEO Caterpillar

Don Tapscott, president of nGenera Innovation Network and teacher within the Toronto University Management Faculty, explains in his book Grown Up Digital (2009) 3 the way in which developing new technologies and media has infl uenced the new generation of consumers, employees, and citizens that grew up surrounded by it. The same can be said about the way in which they work and the expectations they have from a job, searching for a dynamic, egalitarian workplace, which highlights their creativity and acknowledges their merits. At the same time, their degree of sensitivity to social, environmental, or civic involvement is higher, as causes reach them faster. Information is more accessible to them and the possibilities of organizing in order to solve issues are much bigger. The previous generations took most product information from TV or newspaper commercials, or from their friends who tried the products. Today, the Internet generation is permanently connected to numerous networks with thousands of other people who share their opinions and experiences about the products and companies. Consequently, before buying a product, young clients research on forums regarding the satisfaction level those who bought the product had and compare in detail its price and quality with those of competing products. New consumers want to have a say in developing the products they choose; they are prepared to collaborate with the company in order to improve them and react negatively when their requests are not paid attention to. Young people today are more preoccupied with a company’s reputation and integrity, this becoming an important factor when they make the buying decision. Practically, they expect a moral and responsible behavior on behalf of those they give their money to. Practices that lack integrity are shared and sanctioned through social media, leading to boycotting companies that are guilty and even to requesting formal sanctions for lawbreaking.

3 Tapscott, D. (2009), Grown Up Digital , McGraw Hill, New York, Chicago, San Francisco, Lisbon, London, Madrid, Mexico, Milan, New Delhi, San Juan, Seoul, Singapore, Sidney, Toronto.

Case Study: SECOM 4

Such a case happened in Romania in 2012, when the pharmaceutical products distribution company Secom launched an online advertising campaign for a dietary supplement on an especially created website, called www.hate.ro . The campaign had a series of short videos in which actors embodying a close relative of a patient with Alzheimer’s disease or autism were saying they ended up hating them because of the symptoms of their disease. In the end, they had lines for every case: Hate your boy! Hate his autism! or Hate your dad! Hate his Alzheimer! and promising their supplement can give their relatives back. This campaign provoked riot on social media, the company being strongly criticized on its Facebook account and website. Shortly after, due to the online media reaction, organizations that protect the rights of people with autism and other NGOs and traditional media joined the consumers, publishing articles against the campaign and reporting the campaign to the National Council against Discrimination. Their complaint won and Secom was fi ned 8.000 RON and forced to withdraw the campaign. In order to stop image loss, the company replaced its site hate.ro with another called love.ro, promising to collect and contribute in a matching system to donations made by consumers to organizations for people with psychiatric disabilities.

4.3 From Stakeholders’ Management to Stakeholders’ Involvement

Businesses have a responsibility beyond the basic responsibility toward the shareholders; a responsibility toward the larger public, which includes their main stakeholders: clients, employees, NGOs, administration, people from the communities where they operate. — Courtney Pratt, former CEO Toronto Hydro

In order for stakeholders’ management to be truly effi cient and serve its purpose, a real dialogue with all who are included in this category must take place. Simple communications and unidirectional decisions, where management takes notice of stakeholders’ needs and transmits the company’s offi cial position and resolutions, will never manage to have the impact an open, participative dialogue would, where every actor has the opportunity to express and argue their point of view and contribute actively to identifying and implementing the most convenient solutions. However, one must take into consideration the fact that a company’s stakeholders are not only activists or other types of vocal groups, with experience in marketing and passionate about supporting their wishes. They can be shy, passive, or just unaware of the fact that they are part of this category and that they have the right of

4 CNCD, press release (2013), accessed: March 19, 2013: http://www.cncd.org.ro/presa/comunicate-de-presa/comunicat-de-presa-150/ .

making demands from the said company. In fact, a truly ethical company is aware and honors its responsibilities toward its stakeholders regarding fairness and the principles of good corporate governance, out of loyalty. One of the most familiar standards in the area is AA1000 Stakeholder Engagement Standard . 5 Its 2011 edition was written after a long process (started in 2006), which combined longitudinal studies, offi ce, and fi eld research (surveys) with direct consultations with a varied palette of stakeholders from over 20 countries. According to the AA1000 standard, the stakeholders’ involvement is a process through which an organization tries to motivate its relevant stakeholders to target a certain objective, by achieving the agreed-upon results.

4.4 Transparency and Accountability for the Commitments

Toward Stakeholders

People will want to and will be able to learn about a brand’s citizenship, if it acts correctly socially, economically and environmentally speaking. —Mike Clasper, BD President, Procter & Gamble Europe

Many companies have listed in their strategies, in their policies, and in their ethical codes impressive commitments regarding the protection of stakeholders’ interests and involving them in the decisional process. However, in many cases, this commitment stops abruptly at a declarative level, without having many things in common with practiced reality. This leads to the question: What makes a company that is preoccupied only in theory with the stakeholders’ rights more ethical than one that does not care about them at all? The majority would be tempted to say that the fi rst is not more ethical than the second one, but the answer would be incomplete. Not only is it not more ethical, but it is, on the contrary, much less so. Instead of honestly taking responsibility for the lack of interest regarding the impact their activity has upon the others, such a company uses the illusion of responsibility in order to obtain image advantages and have the public and potential partners perceive it as a business of integrity. Total transparency in the management process and involving stakeholders is the only way through which a company can make sure it is fulfi lling its obligations toward them accordingly. At the same time, transparency offers the public a guarantee that the enterprise is truly responsible.

Let us assume a company you are partners with has demonstrated to hold all the necessary internal ethic management mechanisms in order to be called responsible and of integrity, from the simple conduct code to the internal ethic audit. At a cer-

5 AccountAbility (2008), AA1000 Stakeholder Engagement Standard 2011, fi nal Exposure Draft: http://www.accountability.org/images/content/5/4/542/AA1000SES%202010%20PRInt.pdf ; accessed: March 19, 2013.

tain point, you decide to launch together a product. Your partner will undertake most of the manufacturing process and will manufacture the product in a thirdworld country, explaining to you that the workforce is much cheaper in that part of the world. Because you trust them, you do not require extra information regarding the treatment and remuneration of the workers, because you have no reason to believe an ethical company would risk its reputation and be estranged from the principles it’s been following for years. Neither does that company offer them. Just before the product launch, you fi nd yourself at the center of a media mess, because human rights organizations have discovered your partner was using for manufacturing the work of children held captive in workshops, in squalid conditions, a practice largely utilized in that country. Although you try to defend yourself and say you were not aware of the situation, the product is boycotted on a large scale, and the reputation you built with hard work is irremediably stained. If total transparency had been required, this situation would have been extremely easily avoided. In fact, by offering total transparency, your partners will know they will never be put in this position.

4.5 The Benefi ts of Stakeholders’ Management

Corporate social responsibility is a solid decision. Not because it is a nice thing to do or because we are forced to do it, but because it benefi ts our business. —Niall Fitzgerald, former CEO, Unilever

There are two perspectives from which stakeholders’ management issue can be looked at: a normative one and an instrumental one . With the former, receptivity to stakeholders’ needs must come from the mere ethical responsibility undertaken by the company toward them, without expecting any kind of reward for it. For the second one, their good management has as purpose obtaining material and image benefi ts for the company. No matter the motivation, an appropriate stakeholder management brings a series of palpable benefi ts , such as the following: B1. Transforming opponents into allies A relationship of trust between management and stakeholders ensures the decrease of suspicion of the latter regarding the intentions of the former and of opposition toward their activity. Moreover, a real dialogue, based on trust between the company and stakeholders, can represent a basis for shared initiatives and strong partnerships with them, which will bring both parties fi nancial and image advantages. B2. Creating and maintaining a positive image of the company Showing receptivity toward stakeholders’ needs and requirements offers an inspired response regarding them and can generate image benefi ts that overcome the investment.

Case Study: The Dove Campaign for Real Beauty 6

Therefore, in 2005, Dove’s campaign reacted with empathy toward clients and feminist organizations’ frustration regarding the unrealistic beauty standards imposed by cosmetics advertisements. After conducting studies that proved the beauty ideal promoted by the majority of the industry is unrealistic and harms women’s self-esteem, they launched the advertisement campaign The Dove Campaign for Real Beauty . Billboards and advertisement videos, radio and TV shows, public debates, and a special webpage all were made with the purpose of promoting natural beauty and deconstructing the stereotypes created by the media and campaigns on what being attractive means. Moreover, the campaign fi nanced programs for raising young girls’ self- esteem (through The Dove Self-esteem Fund ), has founded, and fi nancially supported educational programs on this matter in schools and universities ( Body Talk , in schools from the UK and Canada, and Program for Aesthetics and Well-Being at Harvard). It also organized even a global photography exhibition on the feminine beauty, made by female photographs.

Campaign’s results: • Discussing the campaign on 62 TV stations across the USA • Over 1000 materials in the printed or audiovisual media dedicated to the initiative • 650 million of impressions generated in the summer of 2005 alone • Increasing sales for the campaign products with 600 % in the fi rst 2 months • Over one million visitors on the campaign’s website • PR Week’s Consumer Launch Campaign of the Year prize in 2006 • PRSA’s Silver Anvil “Best Of” 2006 prize • Grand EFFIE 2006 prize

We know that our company’s profi table development depends on the economic, social, and environmental sustainability of our community across the globe. We also know that it is in our interest to contribute to the sustainability of those communities. —Travis Engen, CEO Alcan

B3. Improving a company’s economic performance and sustainability

Studies conducted over time by researchers at prestigious universities in stakeholders’ management indicate a direct relationship between this approach and the improvement of economic performance. Therefore, John Preble speaks in his paperwork about a series of studies that refl ect this reality: 7

6 Brodbeck, M. & Evans, E. (2007), Dove Campaign for Real Beauty Case Study, accessed: March 19, 2013, http://psucomm473.blogspot.ro/2007/03/dove-campaign-for-real-beauty-case.html . 7 Preble, John F. (2005), Toward a Comprehensive Model of Stakeholder Management ; in Business and Society Review, 110:4 407–431, pp. 411–413.

• A longitudinal study conducted at Harvard in the 1990s ( Caulkin and Black ( 1994 ) and Kotter and Heskett ( 1992 )) has showed that those companies that take into consideration all stakeholders’ interests have economic performances superior to those that offer priority explicitly to shareholders’ interest. • Both a study conducted in 1995 ( Donaldson and Preston ) and one from 2003 ( Mellahi and Wood ) confi rm the fact that a strategic stakeholder management leads to a better fulfi llment of a company’s objectives, such as development, profi tability, and stability. • A longitudinal study, conducted between 1982 and 1992 by Preston and

O’Bannon on 67 large US corporations, analyzed the correlation between a company’s social and fi nancial performance, discovering that these have always been positively correlated, without any example of negative correlation in the 11 years the study was conducted. B4. Joining the select club of socially correct and responsible societies

We found no greater satisfaction than obtaining our success through fair practices and through strict adherence to the principle that in order for you to win, the one you are doing business with should also win. —Alan Greenspan, former President of Federal Reserve

If a few decades ago it was enough for a company to ensure its own ethics management, today more and more important players understood that, in order to be considered truly responsible and of integrity, it is not enough to limit to their own activity. Their efforts to develop clean businesses can be easily quashed by partners, suppliers, or distributors that put profi t above ethics. That is why more and more big companies require that all partners involved in the manufacturing and distribution chain adhere, through specifi c ethics codes, to their company’s values and principles (e.g., Nokia Siemens Networks, Oracle, Levi Strauss & Co., Yahoo!, The Coca-Cola Company , etc .). In addition, these principles include, most of the time, directly and explicitly, indications in order to have a better stakeholders’ management. Among the advantages of being a member in a select club in what concerns good practices is also the fact that other companies will not worry about sending their clients toward those part of their network of responsible businesses, but will share from their sources trustworthy service providers. They will also make mutually advantageous exchanges of acquaintances and partnerships within the network, knowing that those within it do not represent an image risk in case of association. Not lastly, the simple fact of being part of a network of companies that highlight ethics, maintaining stakeholders’ interests, represents in itself a strong message for them, generating an important image capital and, obviously, helping increase profi t. In the following lines are enumerated a few of the main negative consequences that can appear in case of stakeholders’ interests being ignored, with the mention that most of the times there is more than only one category of negative effects that arises, most often several or even all of them occurring at once. C1. Image losses —The main risk is associated with the lack of sensitivity toward the stakeholders’ interests, especially when it comes to interests already sensitive to the public, such as protecting the environment, that lead in time to lower profi ts or force taking drastic measures for fi xing them.

A brand is a promise made to clients and consumers, employees and its investors, communities, sellers and suppliers. And trust is the glue that holds these relationships together. Break a promise and you will destroy a relationship. If a good brand is a promise, a great brand is a kept promise. —Muhtar Kent, CEO Coca-Cola

C2. Boycotts from clients —Although any business, no matter how fair, has the occasional unsatisfi ed clients, it is always a concern when the consumers array against a company in order to sanction its dishonest behavior. Whether these clients organize themselves through social networks, whether they’re pushed to boycott by activist organizations, the fi nancial and image pressure their actions put on that corporation is many times more signifi cant and can produce serious unbalances. This kind of initiative, although much reduced in amplitude, appeared in Romania too, creating a precedent for others more organized and more consistent.

Case Study: The Boeing Strikes 8, 9

The Boeing company faced this kind of situation in 2008, when approximately 27,000 workers went on strike due to complaints regarding the company’s outsourcing policy and workplace security. The strike lasted for over 50 days; the workers and the company fi nally reached an agreement, with a cost of $1.52B for Boeing. And this strike happened given the fact that the company faced similar situations in 2005, costing the company $1B, but also in 2000 and 1995, these affecting their fi nancial evolution on the long run every time.

Case Study: The Boycott of the Gas Stations 10

This happened in 2011, due to a few drivers’ initiative of boycotting gas stations, especially those of OMV Petrom, in protest for the excessive price raise. Although it did not have impressive results (with the exception of the occasional blocking of some gas stations’ activity for a few hours by clients), the campaign raised, according to the newspaper România Liberă , thousands

8 Gates. D. (2008). Boeing, Machinists reach settlement; pact calls for 15 percent pay raise over 4 years ; in Seattle Times, accessed: March 19, 2013, http://seattletimes.com/html/boeingaerospace/2008319765_machinists28.html . 9 West, K. (2008). Strike could cost Boeing billions . Accessed: March 19, 2013, http://www.nbcnews.com/id/26532652/page/2/ . 10 Mareș, I. (2011), Boicotul benzinăriilor , online, in România Liberă, accessed: March 19, 2013, http://www.romanialibera.ro/tehnologie/internet/boicotulbenzinariilor-online-212772.html .

of followers in the Romanian online environment, a group alone of the most dedicated ones raising over 6500. John Preble (2005) mentions the study conducted in 1997 by T. Downing. He studied the effects of companies’ irresponsible behaviors in relation to their stakeholders. He noted that when not paid attention to, stakeholders can take part in many types of protest movements, from activists that interrupt shareholders’ meetings to clients boycotting, to online negative publicity, to street protesting or even lobbying actions to the government in order to obtain increased protection on the legislative part. These reactions determine, besides image losses, market share loss, a decrease in share price, paying expensive fees to lawyers, and wasting management’s time, all these translating into diminishing company profi t. Whysall had similar fi ndings in 2000 and conducted a research starting from three case studies: three British traders that improperly managed their stakeholders. He discovered that not only did they have economic losses, but the damages they suffered because of the reactions of the dissatisfi ed stakeholders were “extended, intensely publicized, lasting and hard to control” ( Preble, 2005, p. 413 ). These discoveries are reinforced by the study conducted by Frooman (1997), who studied the reaction the stock market had in 27 case studies comprising 27 companies that acted irresponsibly or broke the law. His conclusions were that such behaviors lead to substantial drops in shareholders’ profi t.

I came up with the idea that there could be people in the workforce that feel mistreated. I didn’t want this to happen in my department at that time. I made sure people that work for me are treated fairly, that they can make progress and that they can openly express their feelings. —Tom Voss, President and CEO Ameren

C3. Work confl icts —Consumers and activists are not the only ones that can put pressure on companies when their interests are not taken into consideration. Another very important category of stakeholders is the employees. When their complaints are not properly managed, there can appear strikes that paralyze the manufacturing activity, causing signifi cant fi nancial losses.

C4. A weaker fi nancial performance —Above, we have presented studies that certify the fact that good stakeholder management is good for a company’s profi ts; in the following pages, we will talk about what happens to a company’s fi nances when stakeholders’ interests are improperly managed or simply ignored.

4.5.1 Advantages of Engaging Stakeholders

I don’t pay big wages because I have a lot of money, I have a lot of money because I pay big wages. —Robert Bosch, founder Bosch

Besides the advantages that derive from the mere stakeholders’ management, there are additional benefi ts that can only be obtained by involving them actively in the company’s activity. The authors of the AA1000 standard had the vision that the stakeholders’ involvement usually begins with damage control, in the sense that many times, they are consulted only after something regrettable has happened, which can be put on a company’s shoulders. Still, the studies show that companies that involve stakeholders in the process of solving issues when unwanted and complicated situations emerge can rapidly see how useful their input is and how very needed it is in situations of prevention, identifi cation, and risk management. Thus, what begins as a conjectural situation transforms many times into a long-term mutually profi table collaboration, often with the result of improving strategies and processes, creating partnerships, and bringing in new waves for the company’s operations. Therefore, those that initially were a mere risk factor in the management’s eyes end up, through their feedback and area of expertise, a real resource for skilled businesspersons, contributing, at the same time, to giving the company an image of openness and ethics. The scheme below details some examples and advantages obtained by involving stakeholders, according to the AA1000 standard (Fig. 4.1 ).

fairer and more sustainable social development, by offering opportunities to get involved to those that possess the moral right to have a word to say

the posibility to better manage the company's risks and reputation

sharing resources (knowledge/human resources/money/technology, etc.) in order to solve some issues or target difficult objectives

a better understanding of the complex operating environment, such as market development and cultural dynamics

the possiblity of learning from the stakeholders, in order to improve the products and manufacturing processes

informing and educating stakeholders in order to improve decisions and actions that can have an impact upon company and society

contributing to developing relationships with stakeholders based on trust and transparency

Fig. 4.1 Advantages of involving the stakeholders, according to the AA1000 Stakeholder Engagement Standard

An ideal level of openness in what concerns this process of becoming transparent is not only easy to achieve, but it also presents a series of practical advantages for the company, such as an increase in its credibility among the stakeholders, additional feedback from them in what concerns the activities they were involved in (other than the one received strictly from the participants), help from their part in mapping and analyzing stakeholders, etc.

4.6 How Do We Build a Mutually Profi table Partnership with the Stakeholders?

The fi rst thing that needs to be done in instilling a stakeholder management system is identifying some key questions that structure the implementation process. These questions can be the following (Fig. 4.2 ):

4.6.1 Steps Toward Effi cient Stakeholders’ Management

Step 1. Identifying stakeholders —The fi rst thing that needs to be done in order to successfully manage a broad range of company stakeholders must be to run detailed analyses from which it is sure who they are. In order to ease this identifi cation, we will present in the following sections an exact stakeholders’ map and an analysis.

1. Who are my STAKEHOLDERS?

2. What are my stakeholders' stakes?

3. What RESPONSIBILITIES does my company have toward these stakeholders?

4. What OPPORTUNITIES AND CHALLENGES do my stakeholders create at this moment?

5. What STEPS should I follow in order to cope with these challenges and responsibilities?

Fig. 4.2 Key questions in stakeholders’ management

In order to have the quality of stakeholder, it is not necessary for a person or a group to be involved directly in a company’s operations or formulate claims regarding it. Paolo D’Anselmi explains in his book Values and Stakeholders in the Social Responsibility Era , about the unknown stakeholder, the fact that even someone that is not aware of him/her being affected by a company’s operations can have this quality, such a management having the same obligation to take into consideration the interests of the said person. Step 2. Identifying the nature of stakeholders’ interests —In order to develop a strategy for managing stakeholders’ interests, fi rst one must analyze the area these interests belong to, in order to establish afterward the type of power each one of them has. Thus, stakeholders’ stake is more connected to fi nancial equity, whereas buyers exert most of the time an economic power, through their buying decision. NGOs can have interests of social and environmental nature, but they can also have political power, being able to advocate toward the public decision factors in order to eliminate or restrict certain practices of the company. The government also has a signifi cant infl uence on the business environment, through its policies and the relevant legislation it emits. A category of stakeholders can have multiple kinds of interests at the same time, and different subcategories can have their own interests that do not necessarily coincide with those of the category they are part of. Step 3. Determining their own vulnerability in relation with stakeholders’ necessities — Once stakeholders and the nature of their interests have been identifi ed, the company’s activity must be subjected to an objective opinion, in order to discover the practices that can contravene to those interests. This can be done by analyzing the concrete expectations stakeholders have from the company at the time, compared to reality. Then, once the points that can lead to divergences or harm stakeholders’ legitimate interests have been discovered, there must be developed a strategy in order to reduce those vulnerabilities. This analysis of the weak points must be done with maximum exigency and high standards, its purpose being to prevent potential tensions or confl icts that may negatively affect the company. Step 4. Prioritizing stakeholders’ requests —No matter how dedicated a company may be to CSR and stakeholders’ management, it will not manage to always satisfy all its stakeholders’ interests. This can happen on the one hand because of the insuffi cient resources and on the other hand because of the fact that some of the stakeholders have illegitimate interests, or interests that are simply divergent with the others’. For this reason, it is important to prioritize their needs and requests according to companies’ possibilities, but especially with the attributes they possess – legitimacy, power, and urgency (this theme will be developed when we discuss about classifying stakeholders). Stakeholders’ attributes, as well as their interests, have a dynamic character, modifying over time because of numerous factors. That is why this prioritization must be reviewed periodically, in order to have the certainty that there are no new elements that could generate an increase or decrease in the level of priority of one of the stakeholders.

Step 5. Developing organizational answers —Managing stakeholders’ needs and requests is made easy if the enterprise already has a series of preprepared answers, thus not reaching the situation of not knowing how to respond or it can only do so with delay. This can be done by preparing several scenarios regarding how stakeholders’ interests will evolve in time and elaborating clear procedures in order to meet them. Thus, based on predictions, communication plans will be made, people in charge will be assigned, and lists with the necessary measures will be made, should the scenarios come true. This will offer the company the possibility of answering promptly to stakeholders’ requests, thus helping solve the issues and consolidating the image of a responsible business. It must be taken into consideration that the number of specifi c scenarios is too big for each to be taken into account. That is why these preexistent organizational answers must have a more general character, their form being closer to a company’s policy than a step-by-step helper. Step 6. Monitoring and control —In order to have an effi cient stakeholders’ management, there must be taken into consideration the fact that the environment they activate in is a dynamic one. Their needs and interests modify with it and there are periodically new stakeholders or some of the new ones may lose their relevance. In order to have appropriate strategies regarding them, their evolution needs to be always monitored, and the programs and strategies concerning stakeholders must be reevaluated in compliance with this evolution. That is why a periodical social and environmental audit is recommended, in order to check the impact of the strategies utilized up to that moment, and also requesting feedback on behalf of the stakeholders themselves regarding the way they perceive their relationship with the company (Fig. 4.3 ).

Fig. 4.3 Steps to follow for a good management of the stakeholders

IDENTIFYING STAKEHOLDERS

MONITORING AND CONTROL IDENTIFYING THE NATURE OF STAKEHOLDERS' INTERESTS

PRIORITIZING STAKEHOLDERS' REQUESTS

DETERMINING OWN VULNERABILITIES

4.6.2 Mapping Stakeholders

A simple method of obtaining the big picture regarding a company’s stakeholders and their interests is mapping stakeholders. BSR, 11 an international organization that promotes social responsibility in business, comprised a guide, useful and easy to use, regarding the steps that need to be taken in order to create the map. According to BSR, this mapping requires a collaborative debating and discussion process that has as a result a list of a company’s own stakeholders, together with certain main characteristics they have. This process usually has four steps (Fig. 4.4 ): 1. Identifying stakeholders —In this stage, all the persons or organizations that infl uence or are infl uenced in any kind by the company’s activity are listed: Possible categories: (a) Owners (investors, shareholders, etc.) (b) Employees (permanent employees, temporary employees, former retired employees, potential employees, etc.) (c) Clients (direct clients, indirect clients) (d) Other companies from the same industry (suppliers, competitors, partners, opinion leaders, press) (e) Community (people living near the factories, schools, proprietors’ associations, special interests groups, etc.) (f) The environment (nature, ecologist organizations, future generations, researchers in natural sciences, etc.) (g) Government (public authorities, people that organize public policies, people that emit laws etc.) (h) Civil society’s organizations (NGOs, social partners, cults, etc.) (i) Others

identifying analyzing mapping prioritizing

Fig. 4.4 The steps of mapping the stakeholders

11 Morris, J.—BSR (2012). Back to Basics: How to Make Stakeholder Engagement Meaningful for Your Company; accessed: March 19, 2013, http://www.bsr.org/reports/BSR_fi ve-Step_guide_to_ Stakeholder_Engagement.pdf ; http://www.bsr.org/reports/BSR_Stakeholder_Engagement_ Stakeholder_Mapping.fi nal.pdf .

2. Analyzing stakeholders —Once the stakeholders’ list is fi nished, the way in which they communicate with the company and how they can affect it must be determined. For this purpose, a table can be fi lled, following the criteria:

Possible questions for a broad list of stakeholders: 1. Which are the entities the company communicates/has relations with at the present moment? 2. With what entities could it communicate/collaborate in the future? 3. With whom do the people we collaborate with communicate/have relationships? 4. How can social networks be used in order to identify stakeholders? 5. Who are stakeholders that are not aware of their status or cannot express it? (j) Contribution (value)—does that stakeholder have goods, information, expertise, or other kinds of input that would be useful to the company? (k) Legitimacy—how entitled is the stakeholder to have those interests? (l) Interest to get involved—to what degree would the stakeholder be willing to act for the benefi t of the company, with it, or against it? (m) Infl uence—how much infl uence does that stakeholder have? (n) The necessity of being involved—would there be signifi cant positive effects if that stakeholder gets involved in the company’s operations or would there be negative effects if they do not get involved?

Expertise Interest Value Stakeholder Contribution Legitimacy Interest of getting involved Infl uence The necessity of being involved

Supplier X Big—their losses are tied with the company’s manufacturing Big—they are affected directly by the company’s operations Big—they are already part of the manufacturing chain Small— they are a family business, not very known

Medium— although their pieces are not of great quality, there are (no?) acceptable alternatives on the market NGO Y Small Big Big Medium Medium Competitor Z Medium Medium Small Big Small

Instead of values such as small , medium , and big , we may also utilize codes of different colors or we may assign numbers, with which there can be done various classifi cation operations.

3. Mapping (creating the actual maps) —The actual stakeholders’ map (the physical one) is a visual support that helps provide a better representation of them and of the relationships they develop between them and the enterprise. For doing so, the following steps must be followed: (o) Drawing a square, which will be split into four equal quarters. (p) The basis of the big square will represent the interest , and its height will represent the expertise . (q) The intersection point of the basis with the height will be noted with minimum , and the opposite corners will be maximum . (r) It will be discussed where in the square should every stakeholder fi t, which will be represented graphically by a circle. (s) The size of the circles will be proportional to the value (contribution) of each stakeholder (the most valuable ones will be represented through larger circles).

Maxim

S2

S1

Dimensiunea cercurilor = > valoarea

EXPERTIZA

S

HARTA STAKEHOLDERILOR

Influenta

S Influenta

S4

Minim

INTERES Maxim

4. Prioritizing stakeholders —Once the map is done, prioritizing stakeholders’ interests is no longer so diffi cult to be done, because it is noticeable from the graphic model. In order to be sure that the model is the right one and that it refl ects the proper vision regarding company’s stakeholders, we may use the following set of helping questions:

(t) Which are the problems of the primary stakeholders? (u) What are the most often expressed issues among stakeholders? (v) Are these stakeholders’ issues relevant for the company’s objectives? (w) What role does the enterprise play in generating these issues? (x) What role could it play in solving these issues? (y) What responsibility does the company have toward these stakeholders and why? (z) Others

4.6.3 Steps to Follow for an Effi cient Engagement of the Stakeholders

Once the operational stakeholder management system is in place, the next step can be taken: involving them actively. The way in which stakeholders can be encouraged to participate in the decisional process through an open and long-term communication has become a more frequent endeavor for the managers dedicated to an appropriate stakeholder management. Thus, in the last years, there were printed models, standards, and good practice guides regarding this subject. In case there is the feeling that the priorities on the map do not coincide with the ones the company should have in mind, there needs to be done a review on the stakeholder analysis process or even the identifying stage. In addition, the stakeholders’ map must be updated periodically, when the environment the company activates in changes. In order to have a successful stakeholder involvement, according to the AA 1000 standard, it is recommended for the following criteria to be met (Fig. 4.5 ):

4.6.4 Steps to Follow in the Decision-Making Process

In order to be able to successfully involve the stakeholders in the process of making the decisions that affect them, there are a series of steps to be followed: 1. The planning stage (a) Identifying stakeholders and mapping them, with the methods presented above. (b) Evaluating themes of interest and the best methods through which these can be involved—this can be done by: • Collecting data about stakeholders, using techniques such as analyzing their unsolicited mail (letters, petitions, advertising materials, proposals, etc.) • Analyzing their media activities (appearances in press or TV, content uploaded on the social networks or on their own Internet page, etc.) • By following the activities they organized in the public space (awareness campaigns, lobby/advocacy, newsletters, press releases, etc.) (c) After the evaluation, there will be made a classifi cation of stakeholders after their involvement and the appropriate methods. For this purpose, the AA1000 offers as support the following table (Fig. 4.6 ): (d) Establishing and communicating privacy boundaries —It is better to say from the very beginning what information will be shared with the stakeholders and what information will be kept confi dential but also what information is revealed to the stakeholders with the requirement of it not being shared with the public or the competition.

COMMITMENT TOWARD THE AA1000 PRINCIPLES

CLEARLY DEFINING THE AREA

HAVING A CONVENIENT DECISIONAL PROCESS

CONCENTRATING ON INSTRUMENTAL ISSUES FOR THE ORGANIZATION AND/OR STAKEHOLDER

CREATING DIALOGUE OPPORTUNITIES

INTEGRITY IN WHAT CONCERNS THE ORGANIZATION'S MANAGEMENT

TRANSPARENCY

HAVING AN APPROPRIATE PROCESS OF INVOLVING STAKEHOLDERS

ACTING ON TIME

FLEXIBILITY AND CONSTRUCTIVE ATTITUDE

Fig. 4.5 Requirements for a successful engagement of the stakeholders, according to the AA1000 Stakeholder Engagement Standard

(e) Creating an involvement plan —This plan will then be shared with the stakeholders, who will give feedback on its shape. (f) Setting indicators —Elaborating indicators that allow monitoring and evaluating the process of involving the stakeholders and proving the impact on this process. Such indicators can be, for instance, the number of stakeholders involved in a period of time, the concrete results of their involvement, the number of partnerships made, etc.

LEVELS OF ENGAGEMENT CONSULTING Limited engagement level, the organization asks and the stakeholder answers NEGOTIATION

COOPTING Bilateral or multilateral involvement, characterized by learning from both sides, but the stakeholders and the organization act independently COLLABORATION Bilateral or multilateral involvement, characterized by learning, decision-making or shared actions TRANSFERRING POWER New methods of responsibility, decisions delegated toward stakeholders; stakeholders play a role in the corporate governance ENGAGEMENT METHODS Surveys, focus groups, public or private meetings, workshops, consulting committees, online feedback mechanisms. Collective negotiations with workers through unions Forums with many stakeholders, consulting panels, processes of building consensus, participative decisional processes, focus groups, online feedback mechanisms

Shared projects, commercial associations, partnerships, initiatives that involve several stakeholders

Integrating stakeholders into governance, strategy and operational management

Fig. 4.6 Appropriate methods for each level of stakeholder engagement, according to the AA1000 Stakeholder Engagement Standard

2. The stage of preparing the implementation (a) Mobilizing the resources and increasing the capacity —When the company wants to involve the stakeholders, it needs to evaluate the areas that need to be developed or to consolidate them in order to deal with their needs. (b) Identifying and counteracting the risks associated with involving the stakeholders —Situations like confl icts, resistance to involvement, unrealistic expectations, or even hostile reactions on behalf of the stakeholders can be problematic if they are not seen in time, and measures are not taken in order to counteract their effects.

3. The stage of implementing the stakeholder involvement plan

The challenge was how to maintain and increase the integrity of the only goods we have at our company: our values, culture and our principles and the trust tank between us and our people. —Howard Schultz, Chairman of Starbucks

(a) Inviting stakeholders to get involved —Transmitting on time an invitation toward them, where it is explained clearly and in a customized manner what the company is ready to offer and what is expected of them, regarding their specifi city and the expected results. (b) Informing stakeholders —Utilizing as support the physical and electronic informing materials, with company’s vision on the process, broken down into steps to be followed, objectives, and directions of actions, requesting feedback and integrating it. (c) The actual involvement —It contains the part that sets rules, communicates, and collaborates with the stakeholders that responded to the invitation of

getting involved in the company’s decisional process, through the methods mentioned above. In order to have optimal results, it will take place in an open manner, characterized by good faith, transparency, and constructive attitude. (d) Elaborating and communicating an action plan —Having the company do an action plan for the next stage when producing, after consulting with the stakeholders and noting their results, an action plan that will propose new objectives and corporate governance strategies, based on the discussions. This plan will be sent to those that participated in the discussions and will then be integrated in the document. 4. The stage of monitoring, evaluating, and improving the stakeholders’ involvement process

Balancing the short and the long term is the key in reaching sustainable and profi table development—which is good for our shareholders, but also for the consumers, employees, and our business partners, for the communities we live and work in, and for the planet we live on —Irene B. Rosenfeld, CEO Kraft

(a) Monitoring and evaluating —Monitoring the quality of the process of involving the stakeholders will be done continuously and, periodically, more detailed reports will be done. Their results will be written in a detailed report that will be sent both to the company’s management and to the stakeholders.

Keep in mind: each category of stakeholders has knowledge and expertise valuable in their fi eld and new visions compared to those the management has. These can prove to be priceless resources when it comes to identifying and managing risks or building innovative strategies.

(b) Improving the process —Involving stakeholders is not a fi nite process: it goes on as long as the company operates, meanwhile developing and improving based on the feedback received from it. That is why this process requires dedication and a genuine wish of learning from mistakes and of fi nding more effi cient formulas. (c) Evaluating the results of the action plan —In order for the stakeholders to want to continue their relationship with the company and to get involved in the future as well, it is necessary for the agreed-upon action plan to be followed and to deliver the wanted results. That is why evaluating this plan and transmitting the results toward the stakeholders is the best way of stimulating their continuous participation (Fig. 4.7 ).

Fig. 4.7 The steps of the stakeholder engagement process, according to the AA1000 Stakeholder Engagement Standard

planning process preparing the implementation

monitoring, evaluating, improvement implementation process

creating the strakeholders involvement strategy mapping the stakeholders

preparing the process

the actual involvement

the action plan

•revising past actions •setting the vision for the process of involving the stakeholders •setting the objectives for this process

•defining the criteria for identifying the stakeholders •mapping and prioritizing the stakeholders •selecting the mechanisms of involving the stakeholders

•concentrating on the short-and long-term objectives •setting the logistics of the stakeholder involvement process •setting the rules for this process

•having the stakeholder involvement process take place •ensuring the equality of their contributions •mediating the tensions that can appear as part of it

•identifying the opportunities through the feedback •revising the methods and objectives •planning the future actions

Fig. 4.8 The steps of the stakeholders’ engagement process, according to BSR

In the paper Back to Basics: How to Make Stakeholder Engagement Meaningful for Your Company (2012), 12 BSR formulates a model in fi ve steps for good stakeholder involvement, similar to that presented here (Fig. 4.8 ): And since this part of elaborating the stakeholder involvement strategy is defi ning for the good rewind of the whole process, BSR offers a series of factors regarding the things that need to be done and what needs to be avoided in planning an effi cient strategy (Fig. 4.9 ).

12 Ibid .

REMEMBER: -Connect your strategy of stakeholder involvement with the general business strategy -Concentrate first on the internal aspects, before going to the external ones -Learn from previous experiences: reflect on your successes and try to establish what determined them AVOID: -Choosing the stakeholders that will be involved before setting the objectives of their involvement -Choosing prematurely a format of involving the stakeholders -Ignoring the hesitations that can appear among the company’s personnel

Fig. 4.9 Elements to keep in mind and avoid in elaborating an effi cient stakeholders’ engagement strategy, according to BSR

4.7 Recommendations for Excellence

4.7.1 Practical Recommendations for Increasing a Company’s Capacity in Having a Performing Stakeholders’ Management

Area Knowledge and expertise

Possible questions for evaluating the capacity – Do my personnel have enough knowledge in the area where I want to involve my stakeholders? – Have my personnel worked in the past in that area? – Do my personnel have access to satisfactory sources of information in the area? Abilities – Is there a linguistic barrier between me and my stakeholders? – Do my people know to listen and understand stakeholders’ messages? – Does my company exercise the “think outside of the box” solution fi nding? Actual measures for increasing the capacity (examples) – Requesting the assistance of some consultants/external experts

– Organizing trainings in the area for the personnel

– Acquiring subscriptions to specialized publications

– Hiring a translator in order to facilitate communication

– Creating an internal guide for communicating with the stakeholders

– Organizing team-buildings centered on creativity exercises and solving team issues

Area Technological means Possible questions for evaluating the capacity – Do I have enough and high-performing technological means in order to communicate?

Material resources – Do I have a conference room big enough to organize meetings with all the stakeholders? – Do I have the possibility of internally printing brochures or newsletters of good quality for them? – Do the offi ces have facilities for receiving disabled stakeholders?

Financial resources – Do I have enough funds to get involved in real negotiations with the stakeholders? – Does the nature of my stakeholders’ interests have fi nancial implications? – What is the maximum investment I am willing to make in order to involve my stakeholders? Human resources – Do I have enough personnel for my relationship with the stakeholders? – Do my personnel have the necessary time to take on this task? – Are my employees qualifi ed for this task? Opportunity – Is this the most appropriate context in order to initiate the process of involving the stakeholders? – Is my company confronted with fi nancial or image diffi culties at this moment? – Do my stakeholders face, at the current moment, any particular situation? Actual measures for increasing the capacity (examples) – Procuring quality equipment in order to facilitate conference calls – Procuring licenses for specialized software – Demand simpler ways of obtaining information from the web page – Reorganizing the space in the conference room or renting a room in order to organize meetings

– Procuring a printer that can print brochures

– Installing basic facilities for the disabled stakeholders (e.g. members of organizations with specifi c disabilities, seniors, etc.) – Estimating the fi nancial costs that stakeholders’ requirements involve

– Allocating from the beginning of the year a budget for satisfying their requests

– Setting ahead of time a budget for the process of involving stakeholders (meetings, informative materials, etc.)

– Recruiting additional personnel for the task

– Allocating personnel to work exclusively on the relationship with the stakeholders – Organizing trainings for management and stakeholder involvement – Choosing a favorable context from an economic, social and politic point of view in order to initiate the process

– Choosing a moment where my company is stable and does not have diffi culties

– Analyzing stakeholders’ situation and identifying the perfect moment where they would be willing to get involved

4.7.2 Recommendations in Order to Ensure Real Transparency Vis-à-vis the Stakeholders

Apart from doing what is right, the most important thing is to communicate to people that you’re doing what is right. —John D. Rockefeller

It does not suffi ce to do what the law says. We must be in the front line of these problems [of social responsibility] .—Anders Dahlvig, CEO IKEA

1. Consulting stakeholders regarding the information they consider relevant —

Not always what is considered relevant for a company’s management overlaps with what different stakeholder categories want to know about its operations. If, for instance, for consumers, the fi nancial information can be less interesting or diffi cult to interpret, it is possible for them to want to know more about the conditions where the products manufactured outside the borders are made. For investors, however, the situation could be the other way around. That is why it is always a good idea that every stakeholder category be asked what they would like to know about the company, and this information should be then gathered in a package. 2. Publishing willingly all the relevant information —In what concerns ethics and transparency, the basic rule is better to have too much than not enough. That is why, when an open company fi nds out its stakeholders’ curiosities, it will not wait for the information to be requested, but provide it voluntarily in a specially assigned section of its webpage. Moreover, even if the stakeholders did not express their interest in certain bits of information, but the managers think it should be shared with the public, it is indicated to be posted on the website. Of course, for the information that is legitimately confi dential (such as trading secrets, the employees’ or stakeholders’ personal data, etc.), it will not constitute a lack of transparency not to publish it. However, there is certain data that should not be missing from a truly transparent company’s webpage, such as the list of known stakeholders, the commitments the company has in relation to them, how they are going to be involved in the decisional process and their results, partnerships, etc. 3. Elaborating and communicating periodical reports regarding the stakeholders’ management and engagement and their results —The most elegant and coherent manner of informing regarding the activities of involving stakeholders and the results is having a report that comprises all the events of this kind from the past 6 months, including lists of participants, how much the meetings lasted, and the conclusions. The report should include the plans (and the persons assigned for each objective, with tasks and deadlines), the potential products that resulted, the budget required for each action, the media echo of the initiative, etc. These reports will be presented both to the company’s management and to the stakeholders involved and will be available for downloading on the webpage. The reporting document can be shared as it is or represents a chapter in the CSR report.

Businesses should not be about the money. They should be about responsibility. They should be about the public good, not the private greed. – Anita Roddick, Body Shop founder

4. Conducting and communicating periodically an impact analysis on involving the stakeholders —The half-yearly report is a good instrument for collecting, revising, and sharing all that has been done in the targeted period in respect to involving the stakeholders. Still, the mere reporting says nothing about the actual impact the activities have on company’s performance and on stakeholders’ interest area. In this purpose, there must be done, every 2 years, a thorough impact analysis, from which there must be concluded what measure worked according to the plan and had generated results and what needs to be reconsidered, what changed for the better, and what represented a waste of resources.

Although at fi rst it may seem complicated to isolate the impact of involving the stakeholders and the other multiple factors that affect a company’s performance, by repeating the analysis every 2 years (the time considered minimum for highlighting an activity’s full impact), this will become ever easier to be observed.

However, where it is the easiest and most important to note a real positive impact is among the stakeholders, whose situation and attitude toward the company are expected to modify visibly for the better. Normally, they should be able to more clearly see the impact company’s initiatives on involving them have had on them than it is for the company to evaluate the effects they had on their own economic performance. Finally, the direct and ultimate goal of managing and involving stakeholders, in an ethical and responsible company’s vision, is that of improving its obligations toward them and not of increasing its own performance.

Although in many cases this improvement is visible, it must be a “bonus,” an additional motivation for the enterprise and not a condition for taking stakeholders’ interests into consideration. 5. Requesting public feedback on behalf of the stakeholders regarding the information reported and the relationship with the company —Once all the information has been published on the company’s website, it is indicated for it to offer the possibility to—and even to encourage—all stakeholders to offer feedback. They should be able to say whether they feel the information is complete and easy to understand, if it responds appropriately to the needs they mentioned previously, if they need additional data in order to clarify certain aspects. Also, an enterprise that has quality stakeholder management should not be afraid to ask for public feedback from their representatives regarding how they collaborated. Introducing on the company’s website a section where stakeholders’ representatives can leave, if they sign in, various comments regarding the quality of their collaboration, and how the company answered their requests, this may indeed show to the public that the steps the enterprise took were real and believable. Moreover, even if occasional less-than-fl attering comments might also occur, consumers will appreciate the company’s honesty and courage of not censoring it. This kind of comment is best answered with suggestions and proposals in order to improve the relationship in the future. 6. Requesting and publishing an independent evaluation of ethics —When a company evaluates the effi ciency of its own ethics and compliance mechanisms, there can interfere a lot of factors that may distort the results, from an error out of ignorance to unconscious bias and even conscious attempts of obtaining favor-

able results. Sometimes it is diffi cult for the same organizational culture inside of which the ethics management instruments were elaborated to be able to identify the shortcomings; that does not happen with bad intent, but because those instruments were created according to one’s own image of ethics, in a form its authors thought to have maximum effi ciency. That is why it is always a good idea, both as an image benefi t and as a means of self-control, for the ethics evaluation to benefi t from independent experts that deal with such issues and who can highlight vulnerabilities that cannot be observed from just one angle, but require a trained eye and expertise in the area. Publishing the results of the evaluation made by an independent company that has reputation in this area is the best move a company can make in order to prove to everybody that ethics is not a scheme for making an image for them, but a real commitment that comes from their values, not the hopes of increasing profi t.

4.7.3 The Management of Sensitive Information in Relation to the Stakeholders

When it comes to total transparency in relation to the stakeholders, it is normal that managers’ thoughts, even of those of them who are perfectly ethical and responsible, fl y toward certain aspects of their business whose publishing could generate controversy or adverse reactions if shared with the stakeholders. This is not about covering dubious activities, but it can happen, for instance, for a bank to fear sharing with its clients the fact that it is going through a period of fi nancial diffi culties. This information can create panic, and clients would withdraw their money, thus leading to the failure of an institution that otherwise would have managed to recover easily. In the same way, communicating the fact that a company that manufactures food products is investigating a possible contamination of its products from the supply chain can create image damages that can be very hard to repair even if it proves to be a false alarm. That is why when the objective is maximum transparency, the way in which the information is communicated toward stakeholders is crucial. For this kind of situations, the guide for good practices issued by the International Financial Corporation (IFC), Stakeholder Engagement: A Good Practice Handbook for Companies Doing Business in Emerging Markets (2007) 13 offers a series of practical suggestions: • Presenting sensitive information within face-to-face consultations, in order to offer prompt answers and explanations and defuse tensions

13 International fi nancial corporation (2007), Stakeholder Engagement: A Good Practice Handbook for companies Doing Business in Emerging Markets , accessed: March 19, 2013: http://www1.ifc. org/wps/wcm/connect/938f1a0048855805beacfe6a6515bb18/Ifc_StakeholderEngagement. pdf?MOD=AJPERES .

• Adapting the way of informing for the profi le of each stakeholder category • Presenting the situation with maximum honesty and openness • Explaining the elements of uncertainty, the best- and worst-case scenarios • Offering ways in which stakeholders can get involved to solve the situation and prevent its negative effects • Indicating contacts on this issue and the resources they can receive information from Along with this information, we are going to add a list of practices to follow or avoid when sharing sensitive information that can have a signifi cant impact on the stakeholders and the company.

Right Wrong

RECOMMENDED: - Being empathetic with stakeholders’ reaction, no matter its nature

- Anticipating the possible reactions and preparing agreeable answers - Explaining clearly the steps that need to be taken in order to solve the situation favorably - Invitingrenowned experts to separate the myths concerning the situation fromwhat can really happen - Guaranteeing compensation as much as possible, if company’s activity leads to incidents - Keeping an active communication on the subject, publishing promptly all the news TO AVOID: - Invalidating stakeholder’s violent reactions and accusing them of overreacting - Trying to trivialize the possible serious consequences or presenting things in a more favorable light

- Hiding some uncomfortable aspects or trying to protect the persons responsible - Trying to exonerate by throwing responsibilities on other entities - Using inaccessible language or polite empty speeches - Making unrealistic promises - Trying to buy the stakeholder’s leniency

4.7.4 Recommendations for the Main Actors in the Business Environment in Order to Ensure an Effi cient Stakeholders’ Management

For companies 1. Organizing quarterly meetings with the main stakeholders, in order to discuss their main issues and identify mutually advantageous solutions for solving them and for a common capitalization of opportunities 2. Maintaining a real and constant dialogue with the stakeholders outside these meetings, by keeping the communication lines open and being receptive to their requests with an open mind and a constructive attitude 3. Encouraging the public to have their say regarding the activity and products of the company, on its website and pages from the social networks, answering any possible critics with measures the company will take in order to solve the situation 4. Associating the company’s name only with partners, suppliers, distributors, or consultants that demonstrate ethical and responsible behaviors and concern for good stakeholder management 5. Having brainstorming sessions where both the management and the employees identify what bothers them as consumers regarding the practices of other companies. These practices will then be compared with those of the enterprise and these will be elaborated, with the involvement of the participant employees, certain strategies, and safety systems in order for the company not to do the same thing 6. Replacing the decisional process from the bottom-up by involving the employees in adopting measures and designing strategies and maintaining employees informed regarding the company’s situation, the external context, and the motivations behind the management’s decisions. A decision that cannot be understood and accepted by company staff is less likely to be understood and accepted by consumers

For the public authorities 1. Appropriate regulation of stakeholders’ management, in the sense of introducing obligations toward indirect stakeholders

For stakeholders in general

1. Identifying clearly the companies whose activity they are affected by and that they affect and their legitimate expectations in relation to them 2. Initiating a dialogue with the representatives of those companies, within which these expectations to be expressed concretely 3. In case the company’s reaction to the requests is not an open and constructive one, exerting pressure on it through different means (boycotts, media involvement, authorities, etc.) in order for those requests to be taken into consideration For shareholders 1. Requesting expressly to the company’s management to give priority to managing the stakeholders appropriately 2. Requesting the inclusion of a chapter regarding stakeholders’ management in the annual and/or quarterly reports of the company 3. Monitoring the way in which stakeholder management is done within the company, including by requesting occasional feedback from the stakeholders

For the organizations of the civil society

1. Intensifying the advocacy processes in order to appropriately regulate companies’ responsibilities toward their stakeholders 2. Monitoring the ways in which companies manage their relationship with the stakeholders and signaling publicly any unethical practices 3. Organizing boycotts and campaigns against companies that do not have a responsible attitude toward stakeholders and launching a call toward consumers to join the efforts 4. Making and publishing companies’ score tables in what concerns ethics and their responsibility in relation to the stakeholders For consumers 1. Making sure companies that have a responsible and open attitude toward all their stakeholders manufacture the goods and services acquired 2. Requesting from companies whose clients are to publish them their stakeholders’ management strategy 3. Trying to buy products and services mainly from companies responsible toward all their stakeholders and boycotting the ones that have unethical behaviors toward them

Thus, involving stakeholders and maintaining a real and active dialogue with them represents not only a duty of every company that considers itself ethical but, as shown above, a way of obtaining numerous benefi ts for your company.

Chapter 5 Management of Risks

If you do not have integrity, you have nothing. You cannot buy it. You can have all the money in the world, but if you are not an ethical and moral person, you do not really have anything. —Henry Kravis, cofounder of Kohlberg Kravis Roberts & Co.

In the context of an organization, risk is defi ned as any event or circumstance that can negatively affect that organization. Risks can appear because of the uncertainty on the fi nancial markets, because of project failures, legal debt, crediting risk, accidents, natural causes, and catastrophes, as well as intentional attacks from a competitor or other unpredictable events. Therefore, we can talk about management risks, such as brand and reputation risk; competition risk; customer risk; bankruptcy and the risk induced by suppliers; operational risks such as the commercial, personnel, technological, and e-risk; and fi nancial risks. One of the most notable risks, strongly tied with the compliance and brand and reputation risk, is the risk due to the lack of integrity . Integrity, one of the most important qualities of a company, is diffi cult to uphold, but extremely easy to lose. Corrupt practices that are sometimes imposed on the company by public offi cials with whom they are forced to collaborate, or by corporate abuses that can come from trading partners and competitors, as well as robberies, fraud, or dishonesty on behalf of the employees—these are just some of the practices that lead to destroying a company’s integrity. Once lost, integrity is almost impossible to get back. First, lack of integrity leads to big reputational losses that, even in happy cases, can require years to be straightened out. In addition to the reputational losses, a compromised integrity can lead to damages that are more concrete. Financial losses may arise, such as substantial fi nes, losses due to the costs of malpractice lawsuits,

© The Author(s) 2016 S. Văduva et al., Moral Leadership in Business, SpringerBriefs in Business, DOI 10.1007/978-3-319-42881-9_5 77

business failures, or even the company’s bankruptcy, let alone the substantial time lost for solving problems that could have been easily avoided through correct management of the lack of integrity. According to an LRN Corporation study from 2008, the most widespread risks in what concerns companies’ integrity in ethics and compliance are those concerning electronic data protection (52 %), data confi dentiality (47 %), and intellectual property (32 %). Also notable are intellectual property and environment health (30 %), foreign corrupt practices and anti-bribery (27 %), sexual harassment (26 %), export controls (23 %), interests confl icts (21 %), supply chain issues (20 %), and insider trading (16 %).

5.1 Reputational Risks

It takes twenty years to build a reputation and fi ve minutes to destroy it. —Warren Buffet, CEO of Berkshire Hathaway

One of the most important things for a company is its reputation. The better it is, the more people will trust it. A good reputation offers credibility and safety, which determines other companies to be more inclined to collaborate with such a company and even make some concessions that otherwise they would not, only because they trust it because of its reputation. A compromised reputation, on the other hand, brings only trouble. For a company that does not have a good reputation, it is much more diffi cult to fi nd business partners, close advantageous contracts, or win clients and the community’s trust. Despite its importance—or maybe even because of it—a company’s reputation is very frail. Irregularities, negative publicity, or lack of quality in services or products—any of these things can seriously damage a company’s reputation, even if they are not necessarily intentional and measures are being taken to straighten it out immediately. Sometimes it can take years for a company to win back what it has lost in terms of reputation, and there will always exist the risk that, in case of a future irregularity, people will remember your past mistakes.

What are the activities that lead to integrity loss and the deterioration of a company’s reputation? Besides corruption, such as bribery, influence peddling, fraud, money laundering, and false accusations, there are occasionally situations involving poor quality for the services provided, or cases of company’s product decrease in quality, of damage done to the environment, inappropriate employee treatment, etc. Most of the time, such practices emerge, no matter how much someone would try to hide them, especially considering the increased pressure from groups that fight against corruption and from the global media, which make negative publicity have a bigger impact than in the past, thus leading to a significant increase in the organization’s reputational risk. In order to protect its reputation, it doesn’t suffice for an organization to not do these kinds of things. If a company is involved in such practices, all

entities connected to it will be met with suspicion. That is why the best solution for someone that wants to maintain its reputation intact would be, besides avoiding harming practices, distancing themselves from the entities with reputational issues.

Reputation = a collective representation of the past actions of a company and the results that describe its capacity of delivering results for multiple stakeholders. It continuously measures the company’s relative positioning, both internally and externally.

As with the other types of risks, reputational risks can be reduced through a series of practices and measures. 1. Establishing group processes for an optimal analysis and solution to the issues. 2. Establishing internal policies regarding whistleblowing. A reputational crisis never comes out of nowhere. More than surely, someone within the organization knows something about a situation that can lead to a reputational crisis. If the employees that have this kind of information have the possibility of signaling the situation internally, without fear of the consequences or that they will not be taken seriously, the crises can be avoided or their negative effects diminished because the necessary measures were taken in due time. 3. A good communication strategy. The appropriate message, transmitted by the right people to the right audience through spreading channels, is critical for protecting a company’s reputation. As with any other risk, the best way through which a company can reduce reputational risks is having a risk management strategy. In case the company faces situations that affect its image, the best solution is transparency. The company must accept and admit that something went wrong and to assume responsibility for the mistake. It must take the commitment that it will fi x the problem, explaining clearly and in detail what actions will be undertaken for it and to prove that they’re doing their best for that situation to never happen again. Having a good reputation brings a series of important benefi ts, which represent an important business advantage for a company. In addition, having a bad reputation has unpleasant consequences, which any company that is involved in practices that lack integrity tacitly assumes.

5.1.1 The Benefi ts of a Good Reputation

1. Employees are more loyal to a company with a good reputation. At the same time, recruiting new capable employees that can bring value to the company is much easier. 2. Investors and business partners will be more willing to undertake risks in a company they trust based on its reputation.

3. The public trusts the company and its products or services, being more likely to purchase theirs than those of a company with a bad reputation, even if the latter has better offers. 4. Clients and suppliers are more loyal to a company with a good reputation and are more open to the idea of doing business with it. 5. Mass media and social pressure groups will be more inclined to positively advertise a company with a good reputation than one with a bad reputation. 6. The better a company’s reputation is and the more it upholds it, the more chances there are that when a situation that negatively affects the company’s reputation arises, the consequences be less severe than they would have been otherwise.

There is even the possibility that a crisis, if it is promptly and satisfactorily solved, can improve a company’s reputation.

5.1.2 The Consequences of a Bad Reputation

1. Loss of trust in company’s management from employees, business partners, collaborators, investors, and company’s clients 2. Loss of opportunities 3. Financial loss due to trust and opportunity loss 4. Costs for solving the crisis in the wake of the reputational losses 5. Costs for repairing the reputation and regaining the lost trust

5.2 The Principles of the Management of Risks

Risk management consists in identifying, evaluating, and prioritizing risks, a process followed by the coordinated and economical application of resources in order to minimize, monitor, and control its probability and/or its impact or in order to maximize achieving opportunities.

5.2.1 The Principles of Risk Management, According to the ISO 31000 Standards

• Risk management must add value. • The management process of the risk must be part of the organizational processes. • Risk management activities must be part of the decision-making process. • Risk management must point out especially the uncertainties and presumptions. • The management process of the risk must be systematic and structured.

• Risk management must be founded upon the best available information. • The process and risk management activities must be able to be modifi ed according to needs. • Human factors must be taken into consideration. • Risk management must be dynamic and sensitive to change. • Risk management’s process must be capable of continuous improvement and development. • The risk management process, as well as its activities, instruments, and mechanisms, must be periodically or even continuously reevaluated.

5.3 The Management of Dishonesty Risks

A form of risk management is the management of dishonesty risk. In essence, its role is to protect a company’s reputation by preventing and combating the actions that lack integrity and corrupt practices. Thus, the company’s profi ts are also protected and a series of other risks diminished, like those of blacklisting, fi nes, trials, and negative publicity.

The management of dishonesty risks promotes the idea that it is in the best interest of a company to act with integrity all the time. This idea is founded on the observation that a company has more chances to win and develops more easily if it acts with integrity. This is due, in part, to the public’s increased interest in the way a company does business. Because of this, many managers look for experts to help them incorporate the high ethical standards in their company’s business strategy and in its organizational culture and operational functions. This process is comprised from steps similar to those of the management processes of the other types of risks. 1. The fi rst step in the dishonesty risks’ management process is determining the context in which it happens. In order to do this, it must be taken into consideration the area of operations of the company; its business partners, including its suppliers and other collaborators; their reputations; as well as the benefi ciaries of the company’s products or services. 2. The second step is establishing dishonesty risk evaluation criteria. 3. The third step consists in identifying and mapping the dishonesty risks that threaten the company. In general, in order to create an effi cient risk map, four steps must be followed. The fi rst one is identifying the risks. The second one is identifying the factors that trigger these risks and those that can keep them under control. The third step is identifying the consequences the risks have and the factors that help reduce them. The fourth one is calculating the probability degree for the risks to become reality. (a) Dishonesty risk mapping matrix 1 :

1 Tabuena, J. Compliance and Ethics Risk Assessments , in The Complete Compliance and Ethics Manual, 2nd Edition, copyright 2010, Society of corporate compliance and Ethics.

Probabilitate Mare 5

Medie 4

3

Micâ 2

1

1 Micâ 2 3 4 5 6 7 8 9 Medie Mare

Severitatea impactului 10

The method is simple. A probability matrix is created—on a vertical scale from 1 to 5—and on the other dimension measuring the severity of the impact, on a scale from 1 to 10. This matrix allows observing the risks that have the highest probability to occur, and, by having a severe impact score, it can help establish which risks must be given the highest priority. • Green level —risks that should be monitored but do not constitute a serious threat for the company at the moment • Yellow level —risks that have to be actively monitored and evaluated in depth and that should have risk-reducing strategies applied to them • Red level —risks that require immediate action because of the high probability and because of the very severe impact on the company (b) In order to create a risk map of this kind, the next steps must be followed: • Identifying risks by analyzing the relevant documents (lawsuits the company has been and is involved in, the complaints from whistleblowers, complaints from clients and collaborators, internal and external auditing reports, etc.). • For every risk, we must calculate the probability of it happening and the severity of its impact upon the company. • Once a preset number of risks—or even all risks—are identifi ed, their position will be marked in the table. Their position in the table helps prioritize risks and indicate their urgency level and the attention that should be paid to them in order to diminish them, considering their potential impact on the company achieving its goals. • Once all risks are highlighted in the table, the map will show the exact position of all risks, according to their probability and impact. It will be periodically analyzed and updated, functioning like a database for evaluating risks and their approach in compliance with their potential impact upon the business strategy and company’s objectives (Fig. 5.1 ). 4. The fourth step of risk management in the actual evaluation of the dishonesty risk. This evaluation helps the company concentrate its attention on the risks that actually affect it, that have the potential of harming the company,

identifying risks calculating the probability positioning the risks in the table Analyzing the risks map

Fig. 5.1 Steps to follow in mapping risks

instead of sharing this attention toward all the possible risks, even if some of these do not affect the company or affect it only minimally. Evaluating the dishonesty risks is one of the key components of the comprehensive ethics and compliance programs that businesspersons usually use in order to reduce companies’ exposure to dishonesty risks. It allows them to understand the nature and impact of the risks their company is dealing with, which allows them to elaborate new strategies or improve the already existing strategies in order to reduce these risks.

Evaluating the dishonesty risks is the basis upon which a company’s ethics and compliance program is built, allowing the setting of priorities in such a way that the available resources within it be utilized with maximum effi ciency.

This evaluation of the dishonesty risks must not be misunderstood as an audit, regardless of its nature (i.e., organizational audit, ethics and compliance audit, internal audit, etc.) or with an investigation (i.e., fi nancial, antifraud, or of another kind), even if, because of it, issues that require a more specifi c research may raise to the surface. Auditing and investigations are post facto and require methods of auto- analysis, different from risk analysis, while risk evaluation is an ante-facto evaluation intended to warn. In the same way, the evaluation of dishonesty risks must not be misunderstood as an evaluation of the compliance program, even if it can happen for their objectives to overlap. One must not forget that the evaluation of the compliance program is part of the ethics and compliance audit and the dishonesty risk evaluation is part of the instruments of a solid ethics and compliance instrument. Although evaluating dishonesty risks is separated from other risk evaluations that can happen to take place at the same time within the company, it would be a mistake to ignore them completely. There is the possibility that, within the evaluation of other kinds of risks, valuable information for dishonesty risks may emerge. It is actually indicated for the evaluation of the dishonesty risks to take place within a broader process of evaluation and management of all the risks the company is dealing with. The evaluation of ethics and compliance risks involves, at its minimum limit, obtaining information regarding criminal deeds the company had in the past, direct judicial responsibility—both civil and criminal—and ethics and reputational losses, followed by their analysis and identifying the risks the company is dealing with most often (Fig. 5.2 ).

Before evaluating the risks, a number of preliminary steps must be met, so as the actual evaluation of dishonesty risks may take place as smooth as possible. The steps are the following: 1. Setting an agreed defi nition and understanding of what a “compliance and ethics” risk is. This ensures the fact that all the factors involved in the process speak the same language, thus reducing signifi cantly the risk of misunderstandings. 2. Setting the objectives and area of application of the risk evaluation. 3. Setting the activity levels on which the evaluation will take place (only on the top management or at the lowest level as well). 4. Setting the security level of the materials and information necessary for the evaluation process. 5. Naming the person responsible for the risk evaluation: an external consultant or employee of the company. 6. Setting the working group that will perform the evaluation.

When you’re looking for people to hire, look for three qualities: integrity, intelligence, and energy. If they don’t have the fi rst, the other two will kill you. —Warren Buffet, CEO Berkshire Hathaway

The usual practices in the area where the company operates

Involving intermediaries and consultants, as well as depending on partners

The legal framework and regulations that apply to the company's activity

The location of the company and its subsidiaries

Past and current legal issues of the company

Fig. 5.2 Dishonesty risk factors

An evaluation of the dishonesty risk starts with an evaluation of the risk factors, taking into consideration multiple factors. 1. The usual practices of the area the company activates in —in conformity with these practices, some of the risks are more noticeable. For instance, a company that operates in the fi nancial services is more exposed to the risk of breaking the economic sanctions imposed to certain states of money laundering than a company that operates in constructions. On the other hand, a company that operates in constructions and works in collaboration with the state through the public procurement processes is more vulnerable to corruption deeds such as giving and taking bribe or infl uence peddling. 2. Involving intermediaries and consultants, as well as depending on partners — if a collaborator of the company, either consultant, a supplier, or a partner, is guilty of corruption deeds, the company’s reputation will also suffer, by association. 3. The legal framework and regulations that apply to the company’s activity — it is very important that the legal requirements and regulations regarding conformity and compliance are well known and understood. This shows both the degree of attention authorities give to the kind of activities the company deals with, as well as the possible problems that the local regulations can have and that can affect the company, making it more vulnerable to corruption deeds. 4. Company location —the company may be located or operate in a region where there is a lack of transparency, the necessary corporate governance standards, and proper applications of the rules to which the company should adhere. This indicator is very important, because in those regions with a low level of transparency, it is diffi cult to evaluate exactly how great the risk is for having reputational and integrity problems as a consequence of the interactions with the partners and other collaborators from the area. 5. Past and current legal issues of the company —the analysis of the history of the company’s judicial issues helps the company identify the signifi cant risks the company is dealing with, as well as the issues that require a rapid solution.

The actual process of evaluating dishonesty risks takes place in two stages, which have more steps themselves. First, the relevant information is collected. Then, risks are identifi ed based on an existing analysis. At the end, this information is prioritized based on a risk map. Thus, a typical process of evaluation dishonesty risks will follow the next logical structure:

5.3.1 Identifying the Risks

1. Setting the terminology and defi nitions of the basic concepts that will be utilized, such as, for instance, risk, compliance risk, probability, impact/severity, inherent risk, risk reduction, control, residual risk, ethics, compliance risk evaluation, etc.